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HOW RISING INFLATION AFFECTS THE ECONOMY
The question of whether high inflation will result from the economic turmoil
brought forth by the lingering pandemic and subsequent near-shutdown of commerce for
an extended period is becoming more concerning. Everywhere you look right now, prices
are rising: from groceries to housing to the price you pay at the pump, the cost of goods and
services have been rising at an alarming rate since the beginning of the year. This article
provides insight on how inflation impacts the global economy.
One needn’t be a soothsayer to tell that we are on the precipice of an inflationary period,
what with the headlines and latest economic statistics trumpeting that such an event is
imminent. Many economists are skeptical of President Biden’s 1.9 trillion dollar stimulus
plan, predicting that there will be serious repercussions. However, Janet Yellen, Secretary
of the Treasury, keeps trying to assure us that the United States is on watch and well
equipped to combat inflation. But we know this to be true; rising costs and higher rates do
not come without consequences.
President Biden’s plans and policies have been subjected to scrutiny from myriad
economists. They fear that the President’s stimulus initiatives may over stimulate an
economy already showing signs of recovery now that vaccines are ticking up and a return
to “normalcy” appears to just around the corner. Consumers, sick of a year of lockdown,
are raring to get out and consume; to dine out, shop, be entertained, and travel. Businesses
are reopening at near-to-full capacity and sporting events are allowing fans in the stands
again. Restaurants are phasing out limited occupancy restrictions, and everywhere you
look you see what appears to be a pent up and voracious demand for these things.
Manufacturing, on the other hand, has been operating at reduced capacity and, as a
result, companies are experiencing supply bottlenecks and are unable to keep up with the
growing demand. Consequently, the price for goods and services is increasing. It is
Economics 101: Supply vs Demand.
The author chronicles this by providing incidences of inflation, stating that space on
container ships is up 180% over the year prior, and a semiconductor shortage triggered by
this year’s surge in demand for tech equipment – brought on in part by the surge in
demand for computer and IT equipment necessitated by a large percentage of the
workforce being thrust into finding ways to do its job from home offices – is causing delays
in the production of vehicles, computers, and smartphones. He goes on to emphasize that
Brent Crude oil prices have risen above sixty dollars a barrel for the first time in over a year
after bottoming out below twenty dollars a barrel at this time last year.
When inflation rears its ugly head, interests rates rise. In 2011 the European Central
Bank erroneously raised rates in response to a temporary spike in inflation, with near
disastrous consequences. Greece and Italy’s economies crumbled, threatening to take the
global economy with it and they still haven’t recovered. In the article the author explains
why this is problematic, as temporary increases in prices embolden fiscal hawks who are
often complacent about the dangers of a weak economy.
In America, where increasing inflation expectations and a faster recovery mean price
increases are more likely to be persistent, higher inflation could trigger monetary policy
Federal Reserve has vowed to keep interest rates low and will continue purchasing bonds
in order to compensate for today’s shortfalls. However, the current “average inflation
targeting” regime precludes a long-term or significant overshoot. To tamp inflation back
down, the central bank will eventually have to increase interest rates. The Author’s main
message, which seems self-evident, is that high inflation rates negatively impact the
economy and the markets. And while Biden’s ambitious stimulus packages are still needed,
especially when it comes to beginning the long overdue process of restoring the nation’s
crumbling infrastructure, he must persuade Congress, corporate America and the American
public to accept higher taxes to pay for it all – always a difficult and unpopular task – or
there will be very real and possibly severe consequences which could lead the nation back
into a recession.
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