Inflation Paradigm Shift – An Overview

An interesting article titled “Inflation’s paradigm shift, explained” published in the WEO forum on 3rd November 2022. First, let us what the paper talks about before going to our view.

The article started with the following key points

    • Optimists initially described the global inflationary surge as transitory—the reality of the situation is anything but.

    • Increasingly, experts suggest that higher prices may prove more intransigent and volatile than expected.

    • Efforts to rein in the price spike are further complicated since many inflationary factors transcend the mandate of any one monetary authority.

The Major highlights of the article stated are as follows

A long period of subdued price increases—supported structurally by increased global economic integration, technological advancements and favourable demographics—enjoyed by consumers, businesses and investors around the world has been upended. Supercharged by COVID-19 stimulus payments, prices began to leap in 2021 as countries emerged from lockdowns. Consumer demand jumped because of pent-up demand; economic activity propelled forward. Optimists initially described the resulting inflationary spike as transitory—the reality of the situation is anything but.

By June 2022, inflation in the United States hit 8.6%, a 40-year high. Meanwhile, inflation across the European Union was 10.9% in September 2022. In Türkiye, officially tabulated inflation hit a staggering 54.8% in the first quarter of 2022, while unofficial accounts point to a threefold multiple of that number. The list goes on.

In response, major central banks—including the US Federal Reserve and the European Central Bank, among most others—raised interest rates to slow economic expansion and rein in inflation……

……. the World Economic Forum’s most recent Chief Economists Outlook declared this moment a “time of significant economic danger.” The outlook noted that sustained high inflation is a major burden for consumers—especially low-income communities—since it acts as a regressive tax, hitting lower income households disproportionately hard

At a recent closed-door discussion held during the International Monetary Fund’s (IMF) annual meetings in Washington D.C., a central bank governor from a significant emerging market economy reminded executives gathered how instructive the emerging market experience in fighting inflation could be. “Based on learnings from emerging economies, the path toward bringing down inflation is never linear. But forward curves in developed markets are surprisingly linear at this moment—which would appear incompatible with historical experiences in other parts of the world,” the governor stated.

A growing chorus of voices from the private and official sectors are also pointing to a more cautionary future. “The past two decades of ‘2%’ inflation, growth, and wages have ended,” Bank of America noted in a recent Global Research analysis. “We’re moving back to a ‘5%’ world.” The IMF also reported that global inflation is expected to fall to 6.5% in 2023 and then to 4.1% by 2024. “We expect global inflation to peak in late 2022 but to remain elevated for longer than previously expected,” the IMF stated in an October report.

……… Certainly, the collateral damage in terms of economic loss, unemployment and asset value depreciation (already demonstrable) are difficult to predict. Mindful observers of capital markets speak of emerging fault lines in financial systems brought by rising interest rates.

Perhaps the optimists will prove clairvoyant, and the world will return to the modest real growth environment of recent memory with price volatility well under control. Yet if history is any guide, consumers, businesses and investors might be better served preparing for leaner and less predictable times ahead.

My Perspective

Many may wonder what this article is trying to explain. The main crux of the article is Inflation is going to be a problem for the next couple of years all over the world. Monetary authorities are in a tight spot as inflation is always on their mandate. It is too early to say how inflation may creep up more – though many may not agree or think so, remember people never expected inflation to go so high in the past six months.  We need to wait and watch how monetary policy is going to respond to tackle it.