As the world emerges from the COVID-19
nightmare, at vastly different speeds and scales, novel and pre-existing economic problems could have a pronounced impact on future prosperity. The world is currently facing a trillion dollar inflation conundrum, and not a single nation or industry sector can remain insulated. From governments and businesses to private investors and households, the current outlook for inflation represents the most disruptive economic threat in many years.
In order to understand the current state of
global inflation, it's important to get some context. Developed world economies
and their central banks have experienced very low inflation since the 2008
financial crisis. For most of that period, people have been worried about
disinflation and central banks have made multiple attempts to ignite a spark.
When inflation does occur, central banks are forced to raise interest rates,
which in normal times, has the intended effect of dampening the gears of
While moderate inflation brings new
investment opportunities and stimulates movement, excessive inflation is a
significant threat to growth and social stability. It undermines the value of
savings and currencies, increases the cost of living, and reduces productivity
through increased wage and salary costs. However, due to the novel nature of
the current economic situation, inflation could prove to be even more
problematic when it does kick back into gear.
COVID-19 has expanded an already swollen
global debt environment, and stretched resources to their very limits. A lot of
things will be put at risk if inflation occurs earlier than expected. The
current situation exists due to disparity between monetary and fiscal policy,
along with growing economic inequality both between nations and within them. If
inflation grows faster than expected, or before we're ready to adjust, every
single sector of the economy would be affected.
At the moment, central banks around the
world are striving to create a situation where there is just enough inflation.
They are aiming for around 2% on average, which is the standard 'Goldilocks'
range of not too warm and not too cool. This is difficult to manage at the best
of times, however, let alone as the world emerges from a 1-in-100 year
pandemic. The March US CPI is already at 2.6%, which is the highest rate since
2012. It continues to rise faster than expectations, with core inflation also
way ahead of forecasts.
The world is currently stretched to its
limit, with a shortage of containers, computer chips, and numerous
manufacturing goods already slowing down entire industry sectors. Amidst a
backdrop of uneven vaccination rates and growing tensions between China and
much of the world, any small divergence away from 2% may have larger effects than
anticipated. Leading financial experts disagree about how to tackle this
growing problem, with the global pandemic continuing to confuse economic