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Explained: Why inflation rates are increasing across the globe

Explained: Why inflation rates are increasing across the globe

Explained: Why inflation rates are increasing across the globe
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By CNBCTV18.com Nov 23, 2021 10:20:29 PM IST (Updated)

An increase in the cost of general commodities like food, fuel and energy are reflected in the core price index, which measures inflation.

The cost of food and other essential commodities continues to climb in the United States, as the inflation rate has reached a 31-year high. In October, the inflation rate remained above 5 percent for the fifth straight month, according to a report in The World Street Journal. The consumer-price index (CPI) rose by 6.2 percent in October since the previous year in the country.

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Globally, the situation remains similar to most countries facing an increase in the cost of food, oil and other essential goods while wholesale prices also continue to increase.
What is inflation?
In simple terms, inflation is the rate of increase in the general price level of any economic system. It is calculated by comparing the price of certain goods and commodities like food, energy and fuel each year. Most central banks prefer to have a relatively stable yet positive level of inflation since it is better than the alternative of a recession.
A relative level of inflation makes people invest their money in the economy since bank interest rates remain low. Inflationary pressure is often caused by high demand and excessive cash in the economy. Many experts believe that current inflationary pressure is due to the fiscal stimuli that have increased the amount of cash while supplies remain low due to global supply chain disruptions.
What is causing the inflation right now?
The current bout of global inflation is being caused by two strings of factors. On the supply side, prices of commodities like food and fuel are increasing due to the global conditions caused by the COVID-19 pandemic.
Labour shortages, extreme weather events, breakdown of supply chains and other factors are driving up the prices of food items. The Food and Agriculture Organization (FAO) food price index, which tracks the prices of the most traded food commodities in the world, was at 123.5 points in July against 127.4 points in August. Prices of food in August were 32.9 percent higher than the previous year.
Depleted reserves, booming economic recovery, and under capacity production are some of the additional factors that are driving up the prices of fuel across the globe as well. Coal shortages in Asia, natural gas shortages in Europe and a shortage of petrol across the globe are contributing to increased costs.
On the demand side, the global economy is flush with cash. With cash stimulus being given out to prop up the economy during the COVID-19 lockdowns, many households had excess cash to spend. Restrictions imposed on many businesses and industries also meant that the excess cash was being used to purchase the only available yet scarce resources. In light of shortened supply and heightened demand, the prices of such resources increased rapidly.
Why is inflation worrisome?
Inflation can prove to be really harmful at high levels when wealth gets quickly eroded by rapidly rising costs. Venezuela is currently in a state of hyperinflation with an inflation rate in the thousands of percent, while countries like Sudan, Zimbabwe and Lebanon have very high inflation rates as well.
In such economies, the prices of goods can quickly spiral out of the purchasing power of all but a fraction of the entire society. Even at lower figures, inflation can start eroding savings that individuals have built up over the years.
What experts have to say
While the current inflation is a cause for worry for many and some even tout the current phase as a prelude to a period of dangerous hyperinflation, most economists agree that the inflation rate will begin to taper out by 2022. What is not certain, however, is the level that the inflation rates will settle at after they stop increasing.
With central banks expected to hike interest rates sometime in the near future, a move that drastically reduces the inflation rate as more people prefer to accrue increased interest on their savings and deposits, the current period of inflation is expected to be transitionary for a short period, experts observe.
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