As economies rebounded and major economies continued to benefit from massive government stimulus, a confusing and sometimes frightening buzzword has returned to the conversation: inflation.
In general, inflation is when prices go up and the money in your pocket is not as stretching as it used to be. A little inflation is not a bad thing. But too much of it can really, really hurt the economy and livelihoods.
So is inflation becoming an issue? And if so, who will hurt most?
First of all, why are people talking about inflation right now?
Inflation is news because the economies are growing again.
When factories and supply chains go back to work, it causes transport congestion, rising shipping costs, and a shortage of commodities like copper and oil to produce everything.
Another reason for rising inflation is that some governments – especially those of the United States – are spending so much money to help their economies recover from the pandemic.
So do I have to worry about rising raw material prices?
You would do so if factories pass on those added costs to wholesalers who then pass them on to retailers and then pass them on to you – the consumer – in the form of higher prices.
Are factories increasing raw material costs?
Let us consider the production price, the price change measure that the machine factory for the wholesaler. In China, producer prices rose 4.4% in March on a monthly basis, compared with 1.7% in February.
In the US, production prices rose 1% in March from the previous month, more than double the increase in February.
To put it simply, production prices are going up.
Is that just a problem in the country it’s happening in?
Unnecessary. China is an exporting powerhouse, so when inflation rises there, it does threatens to feed inflation around the world.
What about prices for consumers?
They are also skyrocketing. Consumer prices in the US rose 0.6% in March – Biggest monthly jump since August 2012. Nearly half of that increase was attributable to gasoline prices rising 9.1 in March from the previous month.
In China, consumer prices rose to 0.4 in March.
So will prices continue to climb?
It is a question that is currently hotly debated among economists and policymakers – especially in the US.
Because they cannot agree on whether these price hikes will be temporary or if the US economy is in danger of “overheating”, thanks to the 1.9 trillion dollar coronavirus bailout that Congress passed in February. That big stimulus has significantly added strength to consumer spending – the engine driving the US economy to account for two-thirds of growth.
What does that mean when an economy is ‘overheated’?
When an economy grows too hot, the demand for goods and services increases so rapidly that it exceeds supply, causing prices to rise. That could encourage debtor companies to improve their capabilities, with the expectation that good times will only get better.
Doesn’t sound bad.
That is, if the price starts to go up wildly. Some worry that if that happens, it could spur the US central bank, the Federal Reserve, to raise interest rates – which reduces demand and economic growth.
At that time, all the businesses with excess capacity poured money into could be shut down, meaning the businesses started firing workers.
Yes, you get the picture.
So will the Fed raise interest rates?
Fed Chairman Jerome Powell has repeatedly – and I mean repetition – said the Fed will not raise interest rates until the economy recovers from the devastation of COVID-19. Especially the job market, where there is still a lot to do. Of the 22 million jobs lost due to the decommissioning pandemic in spring 2020, about 8.4 million have yet to be restored.
What kind of inflation could I be feeling right now?
If you have a car, you may feel pain in the pump.
In the US, for example, nearly half of the monthly increase in consumer prices in March was attributable to the increase in gasoline prices.
Globally, food prices are also rising sharply. The Food and Agriculture Organization of the United Nations Food Price Index, which tracks changes in international prices of commonly traded food items, rose for the 10th consecutive month in March to the highest level ever since. since 2014.
Does everyone feel that pain the same way?
Are not. The rising prices of key staples are exacerbating inequalities within and between countries. That’s because for low-income households, necessities like food and fuel make up a larger share of their monthly budget.
In the US, for example, a gallon (3.8 liters) of regular gasoline costs an average of $ 1.92 on April 6, 2020. A year later, it goes up to $ 2.85, according to the Agency United States Energy Information. That 93-cent increase may not sound like much, but it goes up to $ 11.16 to fill the 12-gallon tank of a small car.
Who else feels disproportionate pain?
Inflation also affects fixed income earners – like the elders – because they receive the same benefits every month but due to rising prices, they cannot buy as much as they used to.
What are the long-term effects of all of this?
This difference has contributed to one K-shaped restoration from coronavirus degradation. The top groups, which started out – wealthy people, for example, who own homes and stock portfolios and have continued to work from home during the pandemic – continued to rise, while groups Bottom line – low-wage earners – continue to decline as purchasing power declines, fueling broader inequality.
Sorry. What about a country where food prices skyrocketed?
Everyone needs to eat, and rising prices don’t make that less true.
In Nigeria, inflation is at a level four-year peak This February was led by a 21.79% increase in food prices. The country is experiencing high unemployment and crime rates, and experts warn that a daily rise in commodity prices could cause instability.
In Lebanon, a country that experienced the worst economic crisis in decades before the COVID-19, a sharp drop in the value of the local currency reduced purchasing power, causing food prices to skyrocket. five times what they were in 2019.
What about hyperinflation? What is that, exactly what?
As prices continue to rise at a rapid rate, an economy can experience hyperinflation, commonly defined as inflation of 50% or more per month.
That makes an economy and a society extremely volatile: the price of a commodity like bread can double in a matter of days, and consumers may need a basket of currency to pay for the goods. day. People don’t know what their money will be worth from day to day, which can lead to hoarding and shortages.
Horrible. Is there any country that is going through that right now?
Yes, Venezuela – another economy on its knees before the COVID-19 strike – is currently experiencing it Annual inflation rate 2.665 percent. It takes 400,000 bolivars – the equivalent of 20 US cents – to buy a round-trip ticket in the capital Caracas.
Before hyperinflation occurred in 2017, the exchange rate was about 10 Venezuelan bolivars to the US dollar. As of August 2018, it does jumped to a record 2.45.016 million bolivars against dollars, and currently about 1,885,284 bolivars against dollars, according to U.S. Federal Reserve data.
Faced with a sharp drop in value, the Central Bank of Venezuela recently issued new, higher-value notes to avoid people having to carry smaller notes into stores to make purchases. There is a one million bolivar bill.
Is there any downside to inflation?
A little inflation is a good thing as it keeps the economy growing steadily.
How to do that?
Because if people think that the price will go up slightly, they are less likely to delay the purchase. This is why the Fed sets the inflation target at 2% for the longer term. But they said they are willing to endure inflation that tends to be higher than that target rate for some time as the economy recovers.
Any other benefits to inflation?
If people – or nations on that matter – are in debt, inflation can help ease the burden because they’re paying off those debts in a currency of lower value than they did when they were. loan.