The pandemic has changed the way people in many parts of the world spend their money, and has moved money that could have been used for dining, travel and entertainment, to goods they can play with, sit on or consume at home. The increased demand, combined with persistent difficulties in moving goods from one city or continent to another, sky-high energy prices and labor shortages, have driven up costs.
Some of these pressures are expected to ease towards the end of the year – but not everywhere. “In the United States, the story is different,” the foundation noted. So many people’s retirement from their jobs has created more persistent labor shortages and driven up wages much more than in other countries. The high level of consumption of Americans has also created some of the worst supply chain disruptions.
That US Federal Reserve has made it clear that its primary focus has shifted from stimulating the economy during the pandemic to fight inflation. The bank, which is due to announce its next policy statement on Wednesday, is raising interest rates and pulling up its bond purchases, which ensured that money would continue to flow through the economy. Other central banks, including those in Mexico and Brazil, are taking similar measures.
The strategy is to discourage people from borrowing money to buy a car or invest in a business and restrain the demand for products that are in short supply. However, creeping interest rates risk not only slowing economic growth, but burdening poorer nations with even greater debt well into the future.
“If interest rates rise more sharply, it puts extra pressure on vulnerable developing countries, which have most of their debt in dollars,” said Creon Butler, research director at Chatham House, a research organization in London. That means governments need scarce resources to repay bloated loans instead of adding hospital beds or feeding hungry children.
Frequently asked questions about inflation
What is inflation? Inflation is one loss of purchasing power over time, which means your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual price change on everyday goods and services such as food, furniture, clothing, transportation and toys.
The downturn in China, which is both a major supplier and buyer of goods traded with other countries, is also gaining momentum around the world. The once bubbly the real estate market has crashed. The government has imposed the world’s strictest restrictions and lockdowns to curb Covid, and unexpected power outages have further hampered industrial production.
Growth in the euro area was revised down by 0.4 percentage points to 3.9 per cent, but for some countries the decline was much steeper. Clogs in the supply chain, especially those affecting the car industry, led the IMF to estimate that growth in Germany – the largest economy in Europe – would fall by 0.8 percentage points, twice as much as the average of all countries using the euro.