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High inflation hinders global economic recovery

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Many economists predict that high global inflation may be alleviated next year, but this will not happen naturally. It requires determination and wisdom from all countries. How did high inflation develop so far? This question is thought-provoking.



2021/12/29

On December 9, at a market in Paris, France, a stall owner was waiting for guests to visit. Data show that the inflation rate in the eurozone climbed to 4.9% in November. Photo by Xinhua News Agency reporter Gao Jing


Many economists predict that high global inflation may be alleviated next year, but this will not happen naturally. It requires determination and wisdom from all countries. The first is to strengthen international cooperation in the prevention and control of the new crown pneumonia epidemic; the second is to strengthen the coordination of monetary policy, while decisively responding to inflation, avoid the reappearance of a scenario similar to the “panic reduction” in 2013; the third is to be alert to the long-term risks of high inflation.


"Everyone saw the elephant in the room, but everyone didn't want to mention it, because mentioning it would make people uneasy." In the book "Gray Rhinoceros: How to Deal with Probability Crisis", author Michel Al Walker used this to compare the Grey Rhino crisis, which is a potential crisis with a high probability of occurrence and huge impact. Unfortunately, the signs that it had shown before the outbreak were ignored.


Observing the global inflation phenomenon that has evolved from the end of 2020 to the present, it seems that a new case has been found for this theory. The inflation this time is like a gray rhino that is gradually out of control, bumping right and left under the noses of regulators in various countries, hindering the path of global economic recovery.


How serious is this inflation that has caused the world to worry about?


One is a high value. The inflation rate in the United States has hit a new high in nearly 40 years, the core CPI in the United Kingdom has hit a new high in nearly 30 years, the inflation of the major economies in the eurozone is basically at a historical high, and the inflation rate in Turkey has even reached double digits. The second is a wide range. From Europe and America to Africa, Asia, South America, and Oceania, from developed economies to emerging market economies to underdeveloped economies, almost all suffer from inflation. The third is the length of the chain. From primary products such as bulk commodities, agricultural products, and energy, to intermediate processing links to terminal consumer goods, there is a boom.


How did high inflation develop so far? This question is thought-provoking.


First of all, the ineffectiveness of the US and Western central banks led by the Federal Reserve is an important factor leading to intensified inflation. First, the adjustment of the Fed's monetary policy framework paved the way for its conniving attitude towards inflation. The Fed announced at the end of August 2020 to adjust its monetary policy implementation framework, adopting an "average inflation target", that is, to allow a period of time to exceed 2%, and only need to maintain an average inflation rate of 2% for a long time. It is more committed to employment-targeted Economic recovery. At that time, some economists analyzed that this could lead to hyperinflation and huge debts. Second, in the face of the epidemic, the "faucet" of the money supply was unscrewed. Perhaps it is the fear that the slow response of the Fed after the 2008 international financial crisis will lead to criticism from all parties. This scene is repeated. This time Fed Chairman Powell, under the shelling of former US President Trump, put an early end to the normal monetary policy initiated by former Chairman Yellen. Instead, they chose the combination of "near-zero interest rate +'uncapped' quantitative easing". Data show that the Fed's balance sheet has expanded from 4.1 trillion US dollars in January 2020 before the epidemic to 8.7 trillion US dollars now. Developed economies such as the European Union and Japan followed closely behind. The ultra-loose monetary policy has brought about a global ultra-low interest rate environment and flooded liquidity, providing a breeding ground for high inflation. Third, the adjustment of monetary policy is hesitating. The Fed has been vowing earlier that inflation is only a "temporary phenomenon," and that the employment data that it is watching closely have not improved. At the same time, it is worried about the economic recovery process and the overreaction of the capital market. It has been questioned.


Secondly, the misalignment of supply and demand caused by the epidemic crisis "adds fuel to the fire." With repeated outbreaks of the epidemic and the iteration of virus strains, countries seem to be trapped in a cycle of "unblocking-aggravating the epidemic-closing", disrupting the global supply chain cycle. On the one hand, with the popularization of new crown vaccination and the restart of economic activities, various countries have successively introduced fiscal stimulus programs, which have increased the purchasing power of residents and achieved rapid recovery in demand. This is also the significant difference between the inflation caused by the current epidemic crisis and the inflation during previous economic crises. On the other hand, the supply bottleneck is prominent. The recovery of bulk commodity production capacity requires a long period of time. The chip, automobile, chemical, pharmaceutical, and other industries are severely blocked. Logistics and transportation are affected by the epidemic, labor shortages, and supply chains in various countries are unevenly repaired and not functioning smoothly. , These factors are intertwined and superimposed leading to commodity shortages and rising prices.


Finally, a deep-seated reason that is easily overlooked is that the globalization process has encountered a countercurrent. In the past 30 years, the reason why major economies in the world have been able to maintain a low inflation rate is largely due to the fact that technological progress and globalization constitute deflationary forces and curb the occurrence of high inflation. This is also an important reason why Powell judged that inflation is only temporary. However, in recent years, trade protectionism and unilateralism have revived, and frequent trade disputes and industrial chain reshaping have caused the globalization process to be frustrated to a certain extent. The value chain and international division of labor formed in the globalization process are facing reorganization. In-depth structural changes have led to a weakening of the power to curb inflation.


The high inflation sweeping the world not only raises the cost of living of the people, but also intensifies the polarization between the rich and the poor, devours global wealth, and affects economic recovery, it is more likely to incubate populism, extremism, and other social thoughts and undermine social and political stability. All countries need to work hard to prevent and resolve difficult problems. Although many economists predict that high inflation may be alleviated next year, this is not something that can be achieved naturally. It requires determination and wisdom from all countries.


It is necessary to strengthen cooperation in the prevention and control of the new crown pneumonia epidemic. The frequent mutation and iteration of the new coronavirus are still one of the most important destabilizing factors facing the global economy. Only when the global vaccination penetration rate reaches the immunization requirement, economic production is expected to gradually return to normal, the bottleneck of the supply chain can be alleviated, and consumer prices can fall.


It is necessary to strengthen the coordination of monetary policy. In the face of turbulent inflation data, the Fed's Monetary Policy Committee resolution in December showed that the Fed has abandoned its view of "temporary inflation" and has accelerated the pace of downsizing. It is expected to raise interest rates three times next year. However, if the pace of interest rate hikes is further accelerated in the future, international capital will accelerate the return of capital from emerging markets to the United States, and the turmoil in the capital market may spread to the world. The pace of monetary policy in different economies is not the same. Developing economies such as Brazil, Russia, and Turkey have been forced to raise interest rates ahead of schedule in order to curb imported inflation. Therefore, the world should strengthen monetary policy communication, and while decisively responding to inflation, avoid the recurrence of a scenario similar to the “panic reduction” in 2013.


We must be alert to the long-term risks of high inflation. Factors such as population aging and supply chain upgrades are likely to push up price costs over a longer period of time. Looking back at global history, the duration of the inflation cycle is uncertain, and long-lasting inflation will cause great damage to the economy. Therefore, countries around the world should not take the control of high inflation lightly, but also need to uphold long-term thinking, strengthen cooperation with a broader vision and a more responsible spirit of responsibility, and work together to deal with it. 


Source: Economic Daily Editor: Feng Shi

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