Rising Inflation, as a surge in demand after the easing of Covid-19 lockdowns, has been confronted by supply bottlenecks and rising prices around the world. Central banks responded differently to the sharp consumer-price increases in every country. Most of them increased the interest rates except two, the Federal Reserve and the European Central Bank. The reason why their responses differ is mainly due to the reason whether a further increase in prices will feed further cycles of inflation or fade out. The largest central banks are relying on that there are sufficient under-utilized workers available to keep wage rises in check and households as they have a track record of keeping inflation low. In poorer countries, the largest share of spending usually goes to food and energy that have seen the largest price rise. In Chile, the central bank increased its interest rate to 2.75% by 1.25%, which is the biggest rate increase in 20 years. Price rises began to accelerate in March, and the inflation rate was above what the central banks had expected. According to the chief strategist at UBS Research, Emerging markets are turning hawkish because there is a risk of inflation expectation going much higher.” Without increases in wages to match, many households are in financial difficulty.
https://www.wsj.com/articles/inflation-sets-off-alarms-around-the-world-11634304187
2 comments:
This is definitely an issue I see effecting us for the next couple of years. Obviously there is no quick way to fix this issue and inflation is not always a bad thing, but eventually we should hope to see an increase I wages to counter the inflation. Another thing I see that could possibly come with implications is banks increasing interest rates. In theory you would think this would discourage consumers to borrow money, which then they have less money to spend, resulting in lower economic productivity. Keeping interest rates low make sense to me because it encourages an individual to borrow money to offset the wage that hasn't increased yet in comparison to inflation.
As Justin mentioned, inflation is not always a problem. In class we discussed the liquidity trap that East Asian Economies suffered from. With the nominal interest rate (i) being set at a zero lower bound, it means that if inflation is negative, then the real interest rate (r) would need to be positive because of the zero lower bound. In a recession, inflation needs to increase and lower interest rate but in a recession, there's deflation (often) which means r needs to increase which is the opposite of what we want.
However, interest rates in the United States are already low and inflation is also increasing. Lower interest rates means that people are not encouraged to save, and thus, encouraged to spend. With the inflation going up, people may not be encouraged to consume either.
Post a Comment