The one thing we have all noticed since being free from the pandemic is the prices of almost every product we purchase has gone up, and quite significantly. Prices are going up at their fastest rate since the early 1980s. In the UK the Consumer Prices Index (CPI) rose by 6.2% in the 12 months to February 2022. In the United States the inflation rate has reached a 31 year high, but today’s inflationary surge is being felt not just by the advanced economies but also by the majority of emerging markets and developing economies.
Due to the pandemic, there is a combination of factors which is impacting inflation across the globe. One development that is common across all nations is the increase in commodity prices alongside rising global demand. As of January 2022, oil prices were up 77% from their December 2020 level. Even before the pandemic, energy and gas prices were on the rise, but now, the situation with Russia stands to make things worse. Another major issue affecting this chaos is the impact that the pandemic had on global supply chains. Transport costs have skyrocketed which has affected the cost of almost everything including food. The higher energy prices will translate into higher food prices tomorrow (through higher costs for fertilizer, transport, and so forth).
There is no doubt that inflation has come back faster, spiked more significantly, and proved to be more persistent than major central banks initially thought possible. The question is, what can the government and the central banks do now? Almost all Central banks are increasing interest rates. The Bank of England has now increased the Bank rate three times since December 2021, and more rises may be upcoming which isn’t good news for homeowners. The ECB along with The Federal Reserve have made it clear that it is vital that they stop pumping money into the Financial markets.
The situation may very well get worse before it gets better, as Russia’s war on Ukraine stands to exacerbate price pressures, as does a new round of lockdowns in China due to Covid-19. By the same token, fresh lockdowns in places like China should stem the demand for oil, causing the price to fall, bringing inflation down with it.
Given that they don’t expect the causes of the current high rate of inflation to persist, the Central banks are hopeful that the rate of inflation will fall considerably over the next couple of years. “It’s unlikely that the prices of energy and imported goods will continue to rise as rapidly as they have done recently. This means that inflation will decline.” Bank Of England