Inflation Taking Over The World

Inflation Taking Over The World

Many somber headlines have resulted from the 9.1% increase in consumer prices in the United States for the 12 months ending in June 2022, the largest increase in four decades. Annual inflation in Germany and the UK, meanwhile For the 12 months ending in June 2022, the rates for - nations with comparable economies - were almost as high: 7.5 percent and 8.2 percent, respectively. Inflation in Spain has reached 10%. Although it may appear that American policies are to blame for this situation, economists like myself are skeptical because inflation is surging almost everywhere, with very few exceptions. Through May 2022, rates in the 38 highly developed nations that make up the Organization for Economic Cooperation and Development averaged 9.65 percent.


What sped up those price hikes beginning in the first quarter of 2021? Demand for computers and other high-tech products increased when the COVID-19 epidemic broke out as many individuals started working from home instead of offices. As a result, there were shortages of computer chips and higher prices for the wide range of machinery and appliances that needed them, including refrigerators, vehicles, and smartphones. Not just chips, either. Cars, televisions, and prescription medications are just a few of the imported things that are commonly used by Americans.

There have been significant disruptions to how items migrate to manufacturers and subsequently onto consumers along what is known as the supply chain, in addition to issues related to shifts in supply and demand. Since 2020, delays in freight, whether it be by ship, train, or truck, have prevented the delivery of a variety of items. The price of shipping goods has significantly increased as a result. These significant delivery delays have highlighted the drawbacks of the common just-in-time inventory management method. Companies are more susceptible to shortages and transportation hiccups when they stock as little of the raw materials needed to create their products as possible. Furthermore, shortages and price increases happen when producers are unable to produce their goods rapidly.

Businesses have become far more vulnerable to market shocks as a result of this strategy, particularly when it involves relying on distant suppliers. The start of the epidemic also had long-lasting repercussions on the job markets. In 2020, numerous companies either laid off or furloughed a sizable number of employees. Many firms discovered that a sizable portion of their former employees were reluctant to return to work when governments started to loosen regulations relating to the pandemic. The outcomes were the same whether those workers had chosen to retire early, looked for new occupations affording a better work-life balance, or had disabilities: labor shortages that necessitated paying higher rates to attract replacements and keep other employees. Again, not just in the United States but throughout the world, all of these forces are at play.

The Ukraine War Made These Problems Worse

Inflation has been made worse by Russia's war on Ukraine, which officially started on February 24, 2022, by interfering with the supply of foodstuffs and energy around the world. The impacts of the battle are felt all across the world and are causing inflation. The second-largest crude oil exporter in the world is Russia. The international oil market has been disrupted as a result of sanctions imposed on Russian imports and Russia's retaliatory suspension of oil exports to European nations.

The demand for oil from the Middle East rises as Europe purchases more of it, which drives up prices. Late in February 2022, the price of crude increased from $101 to $123 per barrel. After remaining high for several months, prices dropped to roughly $100 per barrel by the end of July. In the United States and other countries, food prices have significantly increased, in part because of this dispute. Ukraine is the third-largest exporter of corn and has some of the most fertile soil in the entire globe. The destruction of Ukrainian crops by Russia and its ban on Ukrainian exports have significantly raised the price of agricultural commodities across the globe.

There has been a decline in recent years in support for globalization and international trade. This trend is probably going to continue, as supply chain disruptions and the inflation-fueling war in Ukraine. However, in my opinion as an economist, the advantages of free and open trade still outweigh the present difficulties. In my opinion, there are no fundamental issues with globalization that cannot be resolved. But it will take time, much like reducing inflation and supply chain bottlenecks.