Soaring inflation in the United States – who should be worried?

The latest inflation figures in the US showed that CPI has increased by 7% over the past year. This is the highest reading since 1982, a concerning factor that is already showing an impact on consumers and spending. Retail sales also dropped in December, a month which is usually positive. with the holidays and all.

At the same time, since the global financial infrastructure is built around the US dollar and financial conditions in the US have a global impact, recent inflation development should be put into a broader picture, since its impact can be substantial, in case the numbers don’t start to drop during 2022.

Inflation rising globally

Inflation concentrated into a few items

According to the statistics, not just in the US but also in other countries in Europe, price increases are felt in sectors like used cars, energy, and food. This isn’t a new phenomenon, but one must remember that when prices rise while people’s purchasing power remains the same or weakens, consumers need to prioritize, and spend their money more frugally.

Analysts at XProMarkets view inflation as a top concerning factor in 2022, not only due to the economic impact but also because high prices weigh in on consumer behaviour and how companies spend their budgets moving forward.

There are also risks related to a price-wages spiral, even in case wages do rise this year. That means people have more funds to spend, and when combined with persistent supply shortages, it could take longer than expected until inflation figures simmer down globally.

Supply chain issues in 2022

Alongside the demand component, supply should be monitored as well, especially keeping in mind the situation in China, a country that seems to clamp down on COVID-19 outbreaks at any cost. Restrictions imposed to mitigate the spread of the virus means slower production and exporting, exacerbating an already-worrying imbalance.

High inflation and monetary policy

Inflation figures are even higher across emerging markets. People are trying to protect their purchasing power via online trading with brands such as XPro Markets, but since prices are high, central banks need to act.

Some of them have already hiked short-term interest rates, including the Bank of England, the first central bank in a developed economy to do so. If the ECB and BoJ are expected to remain at the zero bound, the same can’t be said about the US Federal Reserve, which can possibly raise short-term rates in March. Futures markets are already pricing in three 25 basis point increases in 2022, and even a balance sheet unwinding is now on the cards.

Draining liquidity from the markets

Although fiscal and monetary policies can only impact demand without solving supply issues, higher rates can lead to weakening economic activity, bringing down demand and easing the elevated pressure on prices.

The flip side of things is that economic projections are already being revised lower all around the world, which means monetary tightening can’t continue for an extended period, since that might cause a new economic contraction.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes