The headlines of every newspaper in the year 2022 was all about the 2 very important factors: Inflation in the USA and Recession in USA. Rightly said by Mark Zandi, the chief economist at Moody’s Analytics that “Inflation is on its back heels ”.
The consumer price index (CPI) which has gone all time high up to 9.1% in June has eased to 6.5% in December. The index also measured the volatility of the market and the rise and fall of commodity prices of the goods throughout the year.
One of the reasons for the inflation in the USA is the obvious pandemic situation that took the entire world on a whim. The other major reason was the deadliest bird-flu outbreak last year in the US. It is said to be the worst outburst in history affecting the eggs production and supply. The entire egg supply chain got destroyed due to the deaths of millions of hens. The price of eggs has gone up by 59.9% last year.
Global quarantine and exports ban also added fuel into the inflation fire. Vegetable-oil and wheat producing countries such as Indonesia, Brazil, Canada have halted exporting due to the internal storage causing global shortages.
A number of events that took place in 2022 caused the prices to shoot up causing inflation not just in the States but in almost all the major countries including India. One of the impacted areas is the job recessions. The leading companies have already taken a hit due to inflation and let go of thousands of their employees. Indian companies are gonna face the same situation in a couple of months.
According to U.S. Bureau of Labor Statistics, the inflation in the US in the year 2022 was the highest in four decades. Even the International Monetary Fund (IMF) had warned back in October 2022, that inflation and the increased interest rates by the central bank of the USA, will cause critical situations to the entire global economy.
What caused the Inflation in the USA last year?
While we are discussing the December data on Inflation, let us first look at the root cause of the inflation which started showing its signs in 2021. To curb the increasing prices, the central bank had already increased the interest rates.
Increasing the interest rates is the final step taken by the central banks to curb the supply of money in the market, ultimately minimizing the spending of money by the people. As the primary definition of Inflation says, when the demand of aggregate goods at a certain price level is far more than the supply of those goods, prices tend to rise to an unprecedented level.
The inflation in 2022 in the States was also because of the sudden difference in the demand and supply. People then panic for the later situation and start spending the money they have in hand, enlarging the problem and not reducing it.
There are certain factors that caused US inflation last year –
- Supply Chain Issues – Shipping hindrance added with worker shortages due to the pandemic hit disrupted the supply chains drastically. Along with that, the prices of oil and food commodities spiked suddenly due to the Russia-Ukraine war and the oil prices were hiked up to 100$ per barrel from the previous 76$ per barrel.
- On the demand side – Due to the pandemic, many countries have concentrated on providing meals, shelter and medicination cost to their population. They also lowered the interest rates for the money to be supplied in such an emergency. The increased money supply is also one the main causes of inflation 2022 as it increased the demand drastically creating a difference in demand and supply.
- Lay-offs and unemployment – Lay-offs can be one of factors causing inflation and one of its after effects as well. Due to COVID, many factories were closed, people had no jobs, they had used all their savings in buying food and necessary medication cost. No work means a supply of large workforce but no demand for them, thus disrupting the whole cycle again.
Overall Impact of Inflation
As the inflation soars in recent times, the global economy feels the heat. The Interest rate hikes have added to the troubles. The foreign investors are withdrawing their money due to the shortage of money or high interest rates. India is also taking a hit in FDIs.
Previously estimated by the IMF, the growth rate in the global economy by 2021-22 would be 4%. This was predicated way before all the economies recovered from the pandemic hit and the Russia-Ukraine conflict.
As the inflation rate spiraled to 8.5% in the mid-year, 4 additional interest rate hikes were done by the US Fed Reserve to cut the supply of money as much as possible. These steps taken to curb the inflation have left the whole world dry. Withdrawals of investments, no new development, import cuts disturbing the other developed and the developing economies.
Halt or slow hiring in the companies due to the recession caused by the inflation. Some of the major ones have already laid-off 10-13% of their workforce. This indirectly increases the competition amongst the people due to increase in the people looking for jobs vs the vacancies.
One of the causes of inflation is the stronger dollar which raised 10% this year. Promoting the investors to move their money in the US economy to gain higher profits as compared to other countries. It even depreciates other currencies and increases the rate of borrowing.
Impact of Inflation on GeoPolitics
Though talked separately, Inflation and Geopolitics in today’s time are more interconnected than ever before. The Inflation in 2022 was a result of economic crisis as well as political reasons. Economic reasons were the rise in Consumer Price Index (CPI) rise and supply chain disruption. Political reasons due to the Russia-Ukraine conflict and the political biases due to the conflict.
The developing countries have taken the major hit as the historic inflation rate hikes. Importing oil from Russia is also a major concern in geopolitics as the USA has already asked other economies to look for alternatives and put a lot of sanctions on Russia. The European Union is witnessing socio-political tensions amongst them. India and China are accused of increasing oil import despite the Russian war, supporting force instead of dialogue.
US inflation affects the Indian Economy, by depreciating the Indian currency against the American Dollars. Prices of Gold and Silver are highly volatile. Change in the investment portfolio by the stock market investors are also predicted hampering the Indian industries drastically.
January 2023 Update on Inflation
According to the Inflation data December 2022, the inflation rates are slowed for the straight sixth month to 6.5%. This is the lowest since October 2021. The whole of 2022 has seen exponential rise in CPI. In May 2022, the inflation was 8.6% and then hit an all time high 9.1% in June 2022. Inflation rates slowed down towards the end of the year from 7.1% in November 2022 to 6.5% in December.
Majorly due to the fall in prices of food commodities, mineral oils, petroleum, natural gas etc, the inflation rate fell in December 2022.
As per the January 2023 update, the inflation may go down by the middle of this year. The market has already started showing some balance in terms of rate-sensitive markets, commodity prices etc.
“The inflation is already cooling off” as per the economist Zandi. But the Fed Reserve is still worried about the inflation in the service sector due to the higher wage costs. So, the service sector inflation will be closely watched for a couple of months.
The Fed Reserve might raise rates in February 2023 again but by a meagre percentage, 0.25% points to manage the core inflation.
Conclusion
For inflation rate to skyrocket, there are multiple factors responsible. Especially in the globalized world that we are living today, everything is so interconnected and interdependent. Rise in prices in the USA can lead to hikes all over the world. While the central banks have a closer eye on the rising prices, the global pandemic was totally unprecedented. Initially, when all the countries started investing in their population, economists around the globe estimated the rise in prices and also started implementing steps to mitigate the effects.
While the world economy was coming out of the crisis and trying to find the balance, the geo-political crisis took them back to square one. Not just food prices, but all the sectors have seen the effects of inflation. Rise in petrol prices, recession, lay-offs, higher educational prices, everything took a hit. Some of the countries already suffering fell straight into bankruptcy.
Inflation is not just a bad thing. Little inflation rates are necessary to maintain the flow of currency and maintain its strength, but the exponential growth is a concern. There are certain steps to be taken by the central banks to mitigate its effects on the common people but they have to be applied sooner.