№ 635. Inflation

Hedgeye

 

What Is Inflation?

Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in prices, which is often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods. Inflation can be contrasted with deflation, which occurs when the purchasing power of money increases and prices decline. 

 

Statista

How inflation became a global problem.

Russia’s invasion of Ukraine has caused inflation to become stubbornly entrenched in countries around the globe.

Prices rose last year on the back of supply chain clogs, shutdowns related to Covid-19 and rising energy costs — problems that were expected to fade in 2022.

Six months ago, the Organization for Economic Cooperation and Development estimated that hardly any of its 38 members would see inflation rates rise above 6 percent. The main exceptions were Turkey and Argentina, which were already contending with runaway inflation mostly unrelated to the pandemic.

Since then, sanctions against Russia, one of the world’s top energy and grain producers, have supercharged food, fuel and fertilizer prices. Russian bombing, blockades and seizures have cut off the flow of grain from Ukraine, another top producer, raising the specter of famine in the poorest food-importing nations.

At the same time, China’s policy of locking down areas where there are Covid-19 outbreaks has exacerbated the problem.

This week, the O.E.C.D. announced sobering updates. In seven eastern European nations, the inflation rate is now expected to surge past double digits. The estimated rate for the Netherlands this year nearly tripled to 9.2 percent; Australia’s doubled to 5.3 percent. And like the United States, where inflation rose 8.6 percent through May, Britain and Germany have seen inflation rates hit four-decade highs, well above previous forecasts.

This is likely to eat away at households’ incomes and savings while stunting efforts by companies to invest and create jobs.

Central banks in the United States, Britain, Australia and India have all recently moved aggressively to contain rapidly rising prices by raising interest rates. Even the European Central Bank, which had been reluctant to raise rates for fear of triggering a recession, said Thursday that it would end asset purchases and raise its key interest rate by a quarter-point at its meeting next month, and possibly by even more in September.

 

Hedgeye

In the U.S. and around the world, inflation is high and getting higher

But the U.S. is hardly the only place where people are experiencing inflationary whiplash. A Pew Research Center analysis of data from 44 advanced economies finds that, in nearly all of them, consumer prices have risen substantially since pre-pandemic times.

In 37 of these 44 nations, the average annual inflation rate in the first quarter of this year was at least twice what it was in the first quarter of 2020, as COVID-19 was beginning its deadly spread. In 16 countries, first-quarter inflation was more than four times the level of two years prior. (For this analysis, we used data from the Organization for Economic Cooperation and Development, a group of mostly highly developed, democratic countries. The data covers 37 of the 38 OECD member nations, plus seven other economically significant countries.)

Among the countries studied, Turkey had by far the highest inflation rate in the first quarter of 2022: an eye-opening 54.8%. Turkey has experienced high inflation for years, but it shot up in late 2021 as the government pursued unorthodox economic policies, such as cutting interest rates rather than raising them.

The country where inflation has grown fastest over the past two years is Israel. The annual inflation rate in Israel had been below 2.0% (and not infrequently negative) every quarter from the start of 2012 through mid-2021; in the first quarter of 2020, the rate was 0.13%. But after a relatively mild recession, Israel’s consumer price index began rising quickly: It averaged 3.36% in the first quarter of this year, more than 25 times the inflation rate in the same period in 2020.

Besides Israel, other countries with very large increases in inflation between 2020 and 2022 include Italy, which saw a nearly twentyfold increase in the first quarter of 2022 compared with two years earlier (from 0.29% to 5.67%); Switzerland, which went from ‑0.13% in the first quarter of 2020 to 2.06% in the same period of this year; and Greece, a country that knows something about economic turbulence. Following the Greek economy’s near-meltdown in the mid-2010s, the country experienced several years of low inflation – including more than one bout of deflation, the last starting during the first spring and summer of the pandemic. Since then, however, prices have rocketed upward: The annual inflation rate in Greece reached 7.44% in this year’s first quarter – nearly 21 times what it was two years earlier (0.36%).

Annual U.S. inflation in the first quarter of this year averaged just below 8.0% – the 13th-highest rate among the 44 countries examined. The first-quarter inflation rate in the U.S. was almost four times its level in 2020’s first quarter.

Regardless of the absolute level of inflation in each country, most show variations on the same basic pattern: relatively low levels before the COVID-19 pandemic struck in the first quarter of 2020; flat or falling rates for the rest of that year and into 2021, as many governments sharply curtailed most economic activity; and rising rates starting in mid- to late 2021, as the world struggled to get back to something approaching normal.

 

Syracuse