Inflation Is Becoming A Global Phenomenon

A global phenomenon

Shri V. P. Nandakumar

The sharp fall in petroleum prices in 2020 along with a temporary reduction of value-added tax (VAT) had lowered prices during the year. Later, the introduction of a CO2 pricing in the transport and housing sectors at the beginning of 2021 (a charge of 25 euros, equivalent to US$ 28, per tonne of carbon dioxide emitted) and sharply higher energy prices (up 22.1 per cent year-on-year in November) added to the inflationary pressures.

The US consumer price index rose 6.8% in November 2021 year on year, the fastest pace of increase since 1982, and the sixth straight month in which inflation topped 5%. Regular readers of this magazine may recall that in the August 2021 issue, my article titled “The US has an inflation problem” had dealt extensively with the subject of rising inflation in the US following the pandemic. In the five or six months since, the problem has become even more acute. In December 2021, responding to the high inflation, the US Federal Reserve announced a faster taper of its bond buying programme which has been injecting $120 billion of liquidity every month since June 2020. Bond purchases will now be reduced by $30 billion each month, which will end all fresh bond purchases by March 2022. The accelerated timetable puts the Fed on course to start raising interest rates in the first half of 2022.

Here in India, inflation as measured by the wholesale price index (a proxy for producer prices) accelerated to 14.23% in November 2021, the highest since April 2005, due to a sharp increase in manufacturing costs and food prices. This has given rise to renewed concerns that rising inflationary pressures will soon have to be countered by the RBI raising interest rates. The gap between retail and wholesale price-based inflation has widened in recent months as many companies struggle to absorb surging input costs that undermine their profitability. The wholesale inflation has remained in double-digits for eight months in a row now while retail inflation continues to hover around 5%. It may just be a matter of time before the high WPI inflation spreads to consumer prices as well.

The United Nations Food and Agricultural Organization has said food prices globally are now at their highest levels in more than a decade. According to the International Monetary Fund, consumer prices could rise about 4.8% globally in the next year. As the world braces for higher inflation everywhere, here is a look at how the leading economies of the world are faring.

China's consumer price index rose 2.3% year on year in November 2021 while the producer price index went up 12.9%. An ongoing crunch in energy supplies was the major contributor to the rise in producer price inflation as the cost of coal, a leading source of energy in the country, has risen sharply. The world's second largest economy is growing at the slowest pace in a year as the energy shortages, shipping disruptions, and a deepening real estate crisis take their toll. China’s rising inflation has the world worried considering China's place in the global supply chain and its role as the world's factory supplying a staggering range of goods to consumers around the world.

In the U.K., inflation climbed to a 10-year high with CPI rising by 5.1% year on year in November, which was more than double the central bank’s target. The UK’s Office for National Statistics attributed the rise in inflation to the prices of petrol and second-hand cars, but prices have risen for almost all goods and services suggesting that price pressures are being felt across the economy. As inflation surged, the Bank of England hiked interest rates for the first time since the onset of the pandemic, increasing its main interest rate to 0.25% from its historic low of 0.1%.