Inflation remains high in April, leaving the UK with a headache. Is there any way out of this mess?
Bailey, Governor of the Bank of England, hinted at a possible pause in interest rate hikes if inflationary pressures showed signs of easing. But with the recent inflation reading, that doesn’t seem likely. So, what’s next?
Core CPI, which excludes volatile elements like food and energy prices, remains much steadier and petrol and diesel prices are dipping, however, costs for food, recreation, and culture continued to climb. Can you believe that food inflation is currently at an unbelievable 19%? Households are definitely feeling the pinch.
Inflation Targeting: How Banks Worldwide are Tackling the Inflation Surge
With the Bank of England’s rates already at 4.25%, some economists are arguing that we can expect another 25 basis points increase in May to tackle this relentless inflation. It’s clear they’re struggling to bring down inflation rates. Interesting times ahead!
The global inflation surge began in mid-2021, with many countries experiencing their highest rates in decades. The reasons are manifold, including pandemic-related economic disruptions, supply chain problems, price gouging, and more. The worldwide fiscal and monetary stimuli provided by governments and central banks in response to the pandemic played a crucial role. Unforeseen demand recovery in 2021 led to historic and broad supply shortages, including chip and energy shortages, amidst rising consumer demand. The worldwide construction sectors were not spared either.
The Russian invasion of Ukraine in early 2022 further impacted global oil prices, natural gas, fertilizer, and food prices, worsening the situation. As a result, higher gasoline prices became a significant contributor to inflation, and oil producers reaped record profits. Debates arose over whether inflationary pressures were temporary or long-lasting and the extent of price gouging’s influence. Central banks fought back by aggressively raising interest rates.
Possible Causes of Recession in the US & Beyond
As we zoom in on the causes and background, it’s essential to note that this information mainly focuses on the United States and may not represent a worldwide view. Consumer spending on goods moved in tandem with spending on services before the COVID-19 recession. However, as the recession waned, consumers shifted spending towards goods and away from services, particularly in the United States. This shift strained supply chains, leading to insufficient goods supply and consequent price increases. November 2021 saw inflation in the US at 14.9% for durable goods, compared to 10.7% for consumable goods and 3.8% for services.
In countries where food constituted a large part of the inflation increase, rising prices forced low-income consumers to reduce spending on other goods, slowing economic growth. “In those countries with high inflation, consumer spending has weakened because household spending power has taken a hit from rising prices,” says William Jackson of Capital Economics. “And you’ve generally seen much more aggressive moves to tighten monetary policy.”
As of mid-2022, economists have yet to reach a consensus on the cause of the inflation surge. Several factors have been proposed and discussed, including fiscal and monetary policy, supply chain crisis, and more.
Banks worldwide now target inflation rates as their primary metric for measuring economic flow for monetary policy. When inflation is present, banks will adjust their monetary policy by increasing interest rates or making changes to other policies. Higher interest rates make borrowing more expensive, thus reducing consumption. This approach is implemented deliberately to maintain a level of consumption that will contribute to a steady level of inflation or decrease it, also known as inflation targeting.
What Inflation Means for Investors
Inflation is a big deal for investors, first and foremost, it devalues any profits from investments in real terms so it’s important to keep an eye on it. Speak to a finance professional about which assets are the best in high-inflation markets.
If you’re interested in learning about how Apple is shaking up the banking world, be sure to check out our previous article. In that piece, we explore how Apple is disrupting traditional banking by introducing its own payment platform and credit card.