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Is higher inflation cause for concern? - YouTube
Channel: The Economist
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as the world recovers from covid-19 it's
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now economies that are running hotter
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than predicted the economy is
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experiencing a very strong recovery we
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brought this economy back from the brink
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but with growth has come a surprising
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change
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inflation soared to its highest level in
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over a decade in April the biggest month
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over month increase in September get
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this
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2008 the sharp increase in inflation
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blindsided many economists almost no one
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saw it coming inflation is the least
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predictable it's been for a long time
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probably for decades
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but is this High inflation just a
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temporary blip or could it spiral out of
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control it's the most important question
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for the global economy at the moment
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inflation is when prices rise over time
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it'll be 1.65 please
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it's when items and services from
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bananas and belts to housing and heating
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cost more than they used to meaning you
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get less bang for your buck
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keeping inflation steady is a balancing
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act
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most rich World central banks aim for
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prices to increase by around two percent
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a year at that level consumers don't
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notice changes in prices too much but
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when it becomes higher it can be
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problematic
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you could have a little over two percent
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a lot of the time and not worry too much
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or you can have a lot over two percent
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for a short period of time and not worry
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too much but what you don't want is a
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lot over your target a lot of the time
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because that's really going to start
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causing you economic problems for years
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the question policy makers had been
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asking is why is inflation so low
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economies were quite strong unemployment
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was very low and people were puzzling
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about why prices hadn't taken off as
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much as people expected that they would
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in those conditions
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the pandemic certainly in 2021 seems to
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have turned that on its head somewhat
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and we've had quite High inflation
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especially in the US and that's LED
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people to ask is the era of low
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inflation now over
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in America inflation hit 5.4 percent in
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July 2021
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in the Euro area inflation went up to 3
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in August
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in Brazil it has reached over nine
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percent
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Central Bankers claim that high
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inflation will fizzle out so there's no
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need to worry there will be
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inflation but that the process of
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inflation
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uh will stop all confidence in that
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judgment is somewhat undermined by the
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fact that central banks didn't see this
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burst of information coming so that's
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just revealed that forecasts aren't
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always right
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the worst case scenario could be run
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away inflation like that scene in
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America in the period known as the great
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inflation great spiked to over 14 by
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1980.
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the root cause of this was the Federal
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reserve's loose monetary policy and
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Rising oil prices
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but what's causing inflation to rise
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this time around
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the first clue is in the way inflation
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is calculated
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something that in real terms inflation
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hasn't actually risen that much it just
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looks higher due to the sharp dip in
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prices in 2020
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for example the cost of crude oil in
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September this year was 71 a barrel
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compared to September 2020 when prices
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were recovering from a collapse the
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price has risen by 74 percent but if you
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compare it to September 2019 it's only a
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13 increase this is known as a base
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effect
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and could explain why the European
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Central Bank thinks the peak in
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inflation won't last inflation numbers
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in 21 which we will see Rising are of a
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temporary nature but there are other
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important factors causing current
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inflation Supply chains for example have
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been hugely disrupted by the pandemic
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and just when it has become difficult to
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transport Goods demand has shot up
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making things more expensive increased
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demand is thanks in part to big
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government stimulus policies America for
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example poured 1.9 trillion dollars into
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a covid relief package almost a fifth of
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US dollars in circulation by the end of
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2020 were created that year
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people in America have been really Keen
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to spend their stimulus money that
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they've got during the pandemic on new
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cars unfortunately early in the pandemic
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car makers cut their investment in
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future production combined with that
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we've had this Global shortage of chips
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so there's been not enough Supply
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relative to the amount of new cars that
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people want to buy as a result you've
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had this spillover in demand into the
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second hand car market people are buying
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used cars instead used car prices have
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been a major driver of recent inflation
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in the past year prices have risen by
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over 45 percent although recent months
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have seen a decline
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thank you
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it's not just the rich World suffering
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with inflation Emerging Markets have
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been hit hard too they are also
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experiencing pandemic-related supply
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chain issues and extreme weather has led
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to crop shortages making food more
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expensive
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in Brazil the cost of black-eyed beans
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has risen by 40 in the past year soybean
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oil by 68 and cabbage 76 percent
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tens of millions of Brazilians can't
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afford to put stable Foods on the table
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food and fuel is a big part of the
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expenditure of people in the poor world
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so when these prices go up a lot they
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reduce people's living standards and
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this tends to be watery the poorer you
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are
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it is possible to slow inflation the
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power to do so is in the hands of
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central banks they can do this by
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raising interest rates what happens when
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you raise interest rates generally is
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that people become Keener to save and
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less willing to invest and slowing the
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economy slows up the rising prices
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in rich countries Central Bankers
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haven't felt the need to do this yet
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at the moment we're not seeing evidence
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that would alarms us but we'll watch it
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very carefully but for central banks in
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Emerging Markets sitting tight isn't
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always the best option
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their institutions are somewhat less
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credible than uh the institutions of the
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rich world so central banks have to be
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more on their toes and have to clamp
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down on inflation more whenever it rears
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its head Brazil's Central Bank has
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raised its interest rate five times this
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year it was two percent in March in
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September it was 6.25 central banks in
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Russia Mexico and Peru have followed
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suit all announcing increases and others
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are expected to tighten rates in coming
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months they're trying to ensure that not
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only the inflation comes down a bit but
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they also want to signal to the public
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and investors that they don't want
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inflation to be so high and that they're
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credibly fighting it
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people's expectations are the final
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factor to this story
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inflation depends on whether people
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think inflation will get out of hand
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inflation expectations are
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self-fulfilling so people don't think
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inflation is going to happen then it
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won't for the most part
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managing people's expectations is
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difficult especially in such uncertain
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times
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but as long as central banks are worried
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you may not need to be what's been
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unsettling in the pandemic is that
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central banks have been a little bit
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caught out but in general so long as
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central banks maintain their
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independence and their focus we should
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be all right
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thanks for watching to read The
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Economist coverage of inflation click on
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