Inflationary Pressures Keep Rising

Inflationary pressures have become a much greater threat to the global economy than most economists expected one year ago. It was clear to all that inflation rates were going to rise over the course of the past year, but very few economists foresaw just how high inflation rates would rise. Now, inflation is at its highest level in recent decades in many of the world’s most important economies, including the United States, the Eurozone and many leading emerging markets.

There are many reasons why inflation rates are so high today, including:

• Soaring levels of demand
• Supply chain disruptions
• Rising energy and commodity prices
• Rising real estate prices
• Rising labor costs
• Too much government stimulus

With these factors remaining in place in the coming months, there is a strong possibility that inflationary pressures will continue to increase. Should this occur, central banks will be forced to accelerate their plans to raise interest rates, likely led by the United States Federal Reserve in the spring of 2022. In turn, this could bring a premature end to the global economic recovery that has already run into severe headwinds in recent months.

Takeaways

Inflationary pressures are likely to remain in place for many months to come and could force economic and monetary policymakers to focus more of their efforts on combatting inflation rather than boosting economic growth in the wake of the Covid-19 pandemic.