Global inflation refers to the inflationary movements generally noticed in various areas of the economy of a country.
Inflation as measured by the consumer price index mirrors the annual percentage change in the cost to the average consumer of buying a basket of goods and services that may be fixed or changed at specified intervals. Global inflation varies largely, due to the trend components of inflation as well as the rise and fall in the regularities of the commercial phases.
Demand for energy and commodities have stayed robust during the first half of 2014 reflecting the strong growth in emerging and developing economies. These economies’ growth is more energy and commodity intensive than other developed economies. The prospect of sustained strong expansion in these economies suggests that demand growth for energy and commodities will remain concrete, even though global growth is slowing. For example, the oil market has become exceedingly sensitive to news of supply disruptions and political events, which has pushed oil prices to all-time highs. Due to the rise in oil prices agricultural production costs have also risen, directly related with transport costs. This also indicates that the humanitarian challenges of higher food prices will not improve any time in the near future. This seems like a problem that is here to stay with no immediate relief in the immediate future. Some suggest that low interest rates have significant impact on commodity prices and that exchange rate changes also seem to affect this.
The notion that national macroeconomic developments hinge on international conditions is not new. Global inflation acts as an attractor of national inflation rates but many ways in which global inflation is measured exist today. The impact of global inflation has proved to be different in different countries of the world. Better policymaking at national level is an important element in reducing inflation volatility. These better policies will in turn strengthen the global economy. Independence of central banks from the political process also keeps inflation low especially in developing countries. The absence of investment and extensive government involvement in pricing, marketing and distribution in some key crop-producing countries has restricted the drive of food production.
The ugly truth about global inflation for the first half of the year, due to energy prices improving, consumer prices rose at a slower pace across most of the world’s largest economies reflecting sluggish growth. Slowing inflation rates reflects a disappointing performance of the global economy. When inflation is low corporations, families and even governments have a harder time cutting their debt loads, a particular problem if you are a highly indebted nation in the Eurozone. The sharp rise in inflation and fears about possible worsening inflation expectations are already reducing consumer confidence and expenditure. When prices start to drop, consumers can delay buying in the anticipation that they will get improved value for their money in the future. Why rush if the same item will be available at a better price in six months? Collectively these delays slow consumer spending, the economy’s main fuel, in turn, weakening economic activity and creating deflationary pressures where prices consistently fall.
Big companies like Walmart has given large discounts to their shoppers that made consumers spend more but the company has suffered large losses in profit. Walmart is not the only one that has suffered; there are many examples out there. If retailers could raise prices, the extra revenue would allow them to pay their employees more and they will not have to rely strictly on cost cuts to deliver profits. Their employees will thus start spending more money and the economies will flourish which will lead to a better global inflation rate.
Deflation is both deeply damaging and hard to escape in weak economies with high debts. Fixed loans (in nominal terms), dropping wages and prices increases, the burden of paying them and people expecting prices to keep falling, they put off buying things, weakening the economy further. If an economy with high unemployment grows too slowly for too long, prices and wages are likely to fall. Deflation can further restrain spending and even tip an economy into that slippery slope called recession.
Inflation as a whole is bad for all creditors. As prices rise, the buying power of principal and interest payments will be worth less. Fewer goods are being bought at the start of the loan and paying it off becomes a headache for many. Unfortunately, creditors do not only refer to the banks. Everyone that has a claim to any deferred payments is a creditor – that means you and me: the individual. Your savings, insurance policies and pension all make you a creditor. The return on your investments has to overcome the inflation rate before it even goes into real capital growth and therefore your wealth gets smaller and smaller.
The biggest problem facing the rich world’s central banks today is that inflation is too low. Despite the aggressive actions taken by central banks to revive major economies, actual inflations around the world have continued to remain at historic lows. Ultra low inflations have costly side effects: weaker economy and higher unemployment. It also means that nominal incomes grow more slowly than they would if prices were climbing faster and once again this makes household and government debts harder to pay off. Low inflation also makes it tougher for uncompetitive countries within a single currency to adjust their relative wages. There are large debates among bankers on what to do in this situation, each with its pro’s and con’s. The recession from 2008 did much to damage the economy and raising interest rates too soon will have dire effects. Excessive risk taking is most definitely not the answer. Perhaps a commitment too normalising monetary policy is the answer.
References:
Wall street Journal – http://online.wsj.com/articles/global-inflation-eased-again-in-july-1409652259
Benoit Mojon – http://www.benoitmojon.com/pdf/PC2_Global_Inflation.pdf
The economist – http://www.economist.com/news/leaders/21589424-both-america-and-europe-central-bankers-should-be-pushing-prices-upwards-perils-falling
Business week – http://www.businessweek.com/articles/2013-01-28/has-the-world-managed-to-conquer-inflation
CNBC – http://www.cnbc.com/id/101430918
International monetary fund – https://www.imf.org/external/np/speeches/2008/050808.htm