Soaring Inflation Threatens of Deeper Global Crisis

After emerging from the deep crisis caused by the coronavirus pandemic, the global economy is facing new catastrophic scenarios with rising inflation.

After inflation has been anemic for several years, despite numerous attempts by central banks to revive it and push it out of the zone well below targets, price growth has suddenly exploded in recent months.

Initial inflation growth has been described by the US Federal Reserve and other major world central banks as temporary and viewed as a temporary phenomenon, mainly caused by the rapid growth of economies in the post-pandemic, which was expected to peak in early 2022 and then begin to decline. .

It seems that the central bankers have made an incorrect estimate, as price growth has accelerated beyond all expectations, driven by various factors that together have pushed inflation to record highs or lows, with no signs of a peak so far.

Many economists believe that rising inflation did not appear overnight, but it was a result of the lengthy process, showing a huge printout of money that was pumped into economies during the pandemic slowdown, to keep them afloat and keep ultra. -low interest rates.

This points to one of the definitions of inflation that a strong expansion of the total amount circulating in the economy leads to higher inflation.

In addition, the war in Ukraine caused a backlash in rising energy and commodity prices, following a decision by the Western world to reduce and possibly ban imports of oil, natural gas, coal and a number of other raw materials.

Threats that the European Union’s heavily energy-dependent economy, with its already significantly slowing activity, could face catastrophic consequences if imports from Russia cease, triggered the spillover effect on Western economies but also caused the global economic destabilization.

Significantly higher energy and raw material prices led to a rise in end-product prices, which contributed to the second cause of rising inflation – cost-push inflation, while the sharp rise in prices, accompanied by continued supply disruptions, resulted in a shortage of products. . that pushed them prices higher and pointed to the third cause of strong price growth – demand-pull inflation.

The huge rise in natural gas prices from about $ 400 a year ago to more than $ 3,000 in March and currently standing at about $ 1,000, with expectations that gas prices could rise to $ 3500 per thousand cubic meters in the winter, poses a serious threat to developed economies, such as the European Union and the United Kingdom.

At the same time, crude oil prices have risen above $ 100 a barrel, after falling to zero during the pandemic, although global supply is still stable and uninterrupted.

This has led to rising prices for food, electricity and many other essentials that have contributed to the huge rise in the cost of living, further pressuring households and businesses.

Current inflation in the US is 8.3%, just below the 40-year high of 8.5%, hit in March, raising hopes that inflation in the US may have peaked, however, economists are not too optimistic as the so-called core. inflation, closely observed by the US Central Bank and used as a measure for real inflation, rose last month, adding to expectations that the Fed may choose a more aggressive approach at the next policy meeting in June.

The US central bank has already raised interest rates twice, starting with a 0.25% rise in March and 0.5% in May and signaled multiple rates at 50 basis points in the coming months, confirming its commitment to restoring price stability, while President Biden also said fighting high inflation would be his top domestic priority.

Inflation in the UK rose to 9% in April, the highest in four decades, driven mainly by rising energy prices.

British inflation, currently the highest in the five largest economies in Europe, but also in the Seven Countries, has further hurt the already high cost of living, which is in the deepest crisis since 1950 ‘.

Rising inflation has put UK households and the economy under increasing pressure, with current government assistance, being so far insufficient to significantly improve the situation.

The outlook remains pessimistic, as the Bank of England has forecast inflation to hit 10%, while economists see an increased risk of a further rise in the current worsening geopolitical and economic situation.

The BoE has already raised rates four times since December, the fastest rise in 25 years and brought its benchmark interest rate to 1%, the highest since 2009.

The central bank aims to control soaring inflation by tightening its monetary policy.

European Union inflation hit a record high of 7.5% last month, boosted by rising energy and food prices, prompting policymakers to act faster.

The European Central Bank said it would likely end its bond purchases in July and warned that it might start raising interest rates in the third quarter. ECB still maintains a zero rate established during the pandemic crisis.

Economists are expecting 3-4 hikes this year, hoping that political tension will bring furious inflation, which is currently nearly four times above the central bank’s target, under control.

A worsening economic situation due to rising inflation poses a strong threat that many developed economies may slip into recession in the coming months as most central banks have already lowered their growth forecasts for the rest of 2022 and early 2023.