Is Higher Inflation cause for concern ?

As the world recovers from covid19 it's now economies that are running

hotter than predicted the economy is experiencing a very strong recovery we

brought this economy back from the brink but with growth has come a surprising

Change inflation soared to its highest level in over a decade in April the biggest month

over month increase in September get this 2008. the sharp increase in inflation

blindsided many economists almost no one saw it coming inflation is the least

predictable it's been for a long time probably for decades but is this high inflation just a

temporary blip or could it spiral out of control it's the most important question for the

global economy at the moment.

Inflation is when prices rise over time that'll be a dollar sixty-five please not that much it's when items and services from bananas and belts to housing and heating cost more than they

used to meaning you get less bang for your buck keeping inflation steady is a balancing

Act most rich-world central banks aim for prices to increase by around two per cent a year at that level consumers don't notice changes in prices too much but

when it becomes higher it can be problematic you could have a little over two per cent

a lot of the time and not worry too much or you can have a lot over two per cent

for a short period of time and not worry too much but what you don't want is a lot over your target a lot of the time because that's really going to start causing you economic problems for years the question policymakers had been asking is why are inflation so low economies were quite strong unemployment was very low and people were puzzling about why prices hadn't taken off as much as people expected that they would in those conditions the pandemic certainly in 2021 seems to have turned that on its head somewhat and we've had quite high inflation especially in the u.s and that's led people to ask is the era of low inflation now over

in America, inflation hit 5.4 per cent in July 2021. In the euro area inflation went up to 3

in august, in brazil, it has reached over nine percent central bankers claim that high

inflation will fizzle out so there's no need to worry there will be inflation but that the process of

inflation

our confidence in that judgment is somewhat undermined by the fact that central banks didn't see this burst of inflation coming so that's just revealed that forecasts aren't always right

the worst-case scenario could be runaway inflation like that scene in America in

the period known as the great inflation rates spiked to over 14 per cent by 1980.

tell me did you uh buy any meat among your shopping no I didn't too expensive

the root cause of this was the federal reserve's loose monetary policy and rising oil prices

but what's causing inflation to rise this time around the first clue is in the way inflation

is calculated some think that in real terms inflation hasn't actually risen that much

it just looks higher due to the sharp dip in prices in 2020 example the cost of crude oil in

September this year was 71 dollars a barrel compared to September 2020 when prices

were recovering from a collapse the price has risen by 74 but if you compare it to September 2019 it's only a 13 increase this is known as a base effect and could explain why the European

the central bank thinks the peak in inflation won't last inflation numbers in 21 which we will

See rising are of a temporary nature but there are other important factors causing current inflation supply chains for example have been hugely disrupted by the pandemic

and just when it has become difficult to transport goods demand has shot up

making things more expensive increased demand is thanks in part to big government stimulus policies America for example poured 1.9 trillion dollars into a covered relief package

almost a fifth of us dollars in circulation by the end of 2020 was created that year

people in America have been really keen to spend their stimulus money that

they've got during the pandemic on new cars unfortunately early in the pandemic car makers cut their investment in future production combined with that we've had this global shortage of chips

so there's been not enough supply relative to the number of new cars that people want to buy as a result you've had the spillover in demand into the second hand car market people are buying

used cars instead of used car prices have been a major driver of recent inflation in the past year

prices have risen by over 45 percent although recent months have seen a decline

it's not just the rich world suffering from inflation emerging markets have been hit hard too

they are also experiencing pandemic related supply chain issues and extreme weather has led to crop shortages making food more expensive in brazil the cost of black-eyed beans

has risen by 40 in the past year soybean oil by 68 and cabbage 76 tens of millions of Brazilians can't afford to put staple foods on the table food and fuel is a big part of the expenditure of people in the poor world so when these prices go up a lot they reduce people's living standards

and this tends to be more true the poor you are it is possible to slow inflation the

power to do so is in the hands of central banks they can do this by raising interest rates what happens when you raise interest rates generally is that people become keener to save and less

willing to invest and slowing the economy slows the rise in prices in rich countries central bankers haven't felt the need to do this yet at the moment we're not seeing evidence

that would alarm us but we'll watch it very carefully but for central banks in emerging markets sitting tight isn't always the best option their institutions are somewhat less credible than

the institutions of the rich world so central banks have to be more on their toes and have to clamp down on inflation more whenever it rears its head brazil's central bank has raised its

interest rate five times this year it was two per cent in March in September it was 6.25

central banks in Russia ,  Mexico and Peru have followed suit all announcing increases

and others are expected to tighten rates in coming months they're trying to ensure that not only

their inflation comes down a bit but they also want to signal to the public and investors that they don't want inflation to be so high and that they're credibly fighting it people's expectations are the final factor to this story inflation depends on whether people think inflation will get out of hand inflation expectations are self-fulfilling so if people don't think inflation is going to happen

then it won't for the most part managing people's expectations is difficult especially in such uncertain times but as long as central banks are worried you may not need to be

what's been unsettling in the pandemic is that central banks have been a little

bit caught out but in general so long as central banks maintain their independence and their focus we should be all right.