- The topic of inflation is on the radar of central bank around the world again, hurt business and consumers.
- Inflation caused by (1) disrupting supply chains, (2) recovery of consumption demand and (3) Easy monetary policies in most countries.
- The developed countries should share up doses of its unused vaccines with other and we might all get pass this madness of inflation together.
The topic of inflation is on the radar of central bank around the world again, after a half year stay as low as negative in many countries. In the US consumer prices rise 4.2% in April (year on year), and marking the biggest increase since September 2008. Annual inflation in the EU was 2% in April, up from 1.7% in March. Two of the biggest economic powers see inflation close to or tend to pass their long term target at around 2%. Inflation also hurt business and consumers, especially during the healing time after one and a half year of Covid-19 suffering.
Graph 01: The USA's Inflation rate highest since 2008
Chart: The Conversation, CC-BY-ND Source: Federal Reserve Bank of St. Louis
The first question is Why?
The rising inflation is said to be caused by (1) disrupting supply chains, (2) recovery of consumption demand and (3) Easy monetary policies in most countries.
(1) After 1 year of disembarking because of covid, everywhere in the world the supply chain is broken and interrupted. For example: Forests are rich abundant habitats full of trees, but the sawmills shut down lumber production due to covid. People stay at home and have a lot of free time to upgrade their house. Hence, lumber prices go up. The same thing happen when you mention used car price, VGA card price, and even mask price...
Graph 02: Manheim Used Vehicle Value Index Mid-May 2021
(2) Most good and services' supply and consumption were at their worst in Q2.2020, when China, Europe and the US were hit by covid. Do you remember the price of crude oil went to negative for the first time in history, one year ago? Then one year later, no wonder, the price level jump the most compare to the bottom of commodity prices due to seasonal effect and the fact that demand recovery faster than supply.
Graph 03: Total Asset of the Federer reserve May 2021
(3)The third reason, when the recession returned, almost at the same time, the central banks around the globe simultaneously eased monetary policy by purchasing long-dated government bonds (in the US), lowering reserve requirement (in China), or reducing operating interest rates. In short, in every countries, the government used monetary easing together with helicopter money from fiscal policy to prevent recession... The return of Keynes.
The second Question is How?
Generally, right full amount of inflation is good. When consumers expect prices to rise, they spend now, boosting economic growth. But even too much of good is bad, surely inflation is included.
The seasonal effect of roaring commodities prices happen naturally and will be here for sometimes, at least until this second quarter ends. The reasing monetary policies, I believe, will be here much longer, at least until 2022. And there is not much we can do about it. The helicopter money is in the hand of policies maker, and they rather see inflation raise other than fall.
How's about disrupting supply chain? We are living in a so globalization and interdependence world that no country can live without demand and supply from others. Take a closer look at your house and all good and services that you are consuming. You will see what I mean. Lumber maybe from local sawmills, but car made in EU, food made in Asia, clothes made in Africa, phone made in China. Your phone again has component parts from every corner of the world.
Graph 04: The world top export and import 2017
Source: How much
Advanced countries export automobile, machineries, high-tech product... while developing countries are main exporter of raw material, food, electronics, fuels, chemical, clothes, homewares... We are so interdependent that if we want price level back to normal, not just in develop countries but also in developing countries, the economy should be back to normal. The world we lived in, need to be vaccinated in order for the supply chain to be healed.
Graph 05: The world vaccination rates by continent
Now G7 countries have most of their adult population injected with Covid Vaccine. They even have much more vaccine dose than needs while the emerging countries dont have nearly enough. Like in the U.S., there are more than 27 million unused Moderna Inc. doses and 35 million from Pfizer Inc. and BioNTech SE, according to data compiled by the Centers for Disease Control and Prevention. Vaccinated People start go out and spending when their fellow human in developing countries still suffer, stay at home, and factories are closed. The world economy is running on one engine now. No wonder, the supply chain is disrupted and price is rising, hurting us all. The developed countries should share up doses of its unused vaccines with other countries and we might all get pass this madness of inflation together.
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