Without a doubt, 2022 has been a challenging year for global markets. Several issues, including supply chain bottlenecks, political instability, and climate change, are driving up global costs for daily commodities. Moving forward, businesses and consumers may adapt better during times of volatility if they have a solid knowledge of the short- and long-term sources of inflation and how this will affect consumer purchasing.
During 2021 and 2022, the annual inflation rates of most nations increased, while Europe, Brazil, Turkey, the United States, and Israel had some of the greatest increases. Approximately half of Eurozone nations experienced double-digit inflation by June 2022, and the region’s average inflation rate hit 8.6%, the highest since its establishment in 1999.
Inflation targets for most central banks are normally between 1.5% and 4% per year. As prices tend to increase faster than salaries, high inflation reduces the purchasing power of people with savings or a fixed income. Hyperinflation, the most severe manifestation of this phenomenon, may result in a complete economic collapse because the currency loses value so rapidly that it becomes effectively worthless.
Cost-push inflation and demand-pull inflation are the two primary sources of inflation. As PWC indicates, in 2022, the global economy is experiencing a robust combination of the two, which helps explain why the figures are so high.
Lingering Effects of COVID-19 Measures
To stop the virus from spreading further, governments all around the world instituted emergency lockdown procedures and sealed their borders. By doing so, they caused a wave of disruption all the way across the supply chain. One theory advanced by Stanford economist John B. Taylor and John Hopkins economists Steve Hanke and Nicholas Hanlon, is that the upsurge in inflation in the United States was caused by the significant increase in the money supply when M2 expanded at a monthly rate of between 22% and 31% in the first few months of the 2020 pandemic. Early in the COVID-19 pandemic, other governments throughout the globe implemented similar stimulative measures to promote the health of their citizens.
The money that was given out as stimulus and the financial support that the governments gave citizens made this situation much worse. People continued to purchase goods despite having less money to spend. Because there were fewer available goods yet there was still a high demand, prices increased naturally. The waves of panic purchasing that happened at the beginning of the pandemic contributed significantly to the prices being pushed much higher than they already were.
ABOUT RON BAUER – THESEUS CAPITAL – www.thescapital.com
Ron Bauer is a venture capitalist, entrepreneur, business mentor and author, with over 20 years of experience. He is focused on the Life Sciences, Technology, EdTech and Natural Resources sectors, where he has created several exciting ventures side by side some of the world’s leading entrepreneurs and scientists as well as world class academic institutions. Ron holds a Master of Business Administration (MBA) degree from the University of Cambridge.