Fret Not, Worldwide Inflation is Merely Transitory

A man buys corn at a UK market amidst a global rise in prices. Source: Reuters

November 23rd marked a tragic date for the consumerist culture of the United States. The strip mall staple, Dollar Tree, announced that it will no longer sell items at the aptly-named price of a dollar. Because of inflation, or a drop in purchasing power due to rising prices, the retailer increased prices to $1.25, sending shockwaves through the low-price, rapid-production nature of capitalism. But, the exigency behind Dollar Tree’s intent is worth more than a mere quarter. The consumer price index, a metric for the percent increase in essential goods, grew by 3.6% in the European Union, 6.2% in the United States, and 10.6% in Latin America. Argentina’s inflation rate is even at a whopping 52%. Global consumers have not witnessed such high levels of inflation since the baby boom after World War II. But these fears of runaway inflation are unfounded, especially considering the nature of the post-COVID economy. Heeding the Federal Reserve’s characterization of inflation as “transitory”, global inflation will fall as the international economy rebounds after the pandemic fallout.. 

The pandemic impacted the two major causes of inflation: demand and cost. In demand-pull inflation, demand outruns supply, leading to a shortage that pulls prices up. Demand for consumer goods dropped drastically during the early stages of the pandemic due to lockdowns. Faced with an unknown virus running amok across continents, individuals across the globe chose caution over consumerism. For example, consumption fell by 7% in Latin America and 8.7% in the eurozone. However, the post-COVID economy not only had a swift rebound but an even swifter overshoot of demand. The newly-freed populace celebrated their liberation through record-breaking purchases, as previously-repressed consumption skyrocketed by 4% in the EU and 12% in the US. Once a wilted rose, consumer spending now percolates the global economy to such an extent that it outruns available inventories. The high demand, paired with a low supply, leads to inelastic consumer demand, allowing suppliers to push prices upward since consumers will still purchase the product. The sudden reversal from underspending led to a supply bottleneck, fueling the second catalyst of inflation: cost-push inflation. 

Cost-push inflation happens when suppliers face growing production prices, eventually pushing the costs onto consumers to maintain their profit margins. Skyrocketing global consumption engendered competition among producers to secure input supplies, such as steel, gas, and lumber, to match the growing demand. The supply bottleneck was already a hailstorm of demand-pull and cost-push inflation, but COVID-19 again complicates the situation, specifically with maritime shipping. Suppliers must now pay six times more to ship products from Asia to Europe since the pandemic induced shippers to remove container ships from service and introduce port lockdowns. Raw materials cannot travel across continents, hindering the production of intermediary supplies, which prevents the trade and production of final products. The amplifying cycle only limits supply and fuels inflation through a pernicious multiplier effect. 

However, while rising prices are a worldly phenomenon, nations and continents suffer from niche and unique incitements of inflation. For example, the United States suffers from an acute case of supply-induced inflation due to a labor shortage. Millions of Americans who exited the workforce during the pandemic are unwilling to return to offices because of public health or family reasons. Notably, almost 2 in 3 mothers left the industry to care for their children; and many are reluctant to return to the workforce even as schools transition to in-person instruction. The labor shortage impedes the day-to-day functions of companies’ planning, production, and procurement of goods and services. The reduced supply results in an upward push on prices -- fueling inflation. To combat this problem, America must view inflation as both an economic and social issue. Specifically, provisions and grants to tackle the country’s spotty childcare coverage would allow many mothers to return to employment. 

On the other hand, Latin American economies suffer from not just a labor shortage, but a confidence shortage. From the 1980s debt crisis to modern-day Venezuela, Latin America’s history and proximity to inflation hollows trust in central banks responsible for managing interest rates. The lack of trust, paired with global fears of hyperinflation, creates a self-fulfilling prophecy: businesses believe inflation is inevitable, incentivizing them to raise prices -- only confirming their previous expectations. Already, commodity prices have increased by 65% compared to 2020. The solution to such a problem is more intricate than tackling America’s private childcare industry and requires a two-pronged approach. The root cause of inflation is entrenched mistrust in monetary institutions, but building trust and faith requires decades. A short-term solution includes instituting price ceilings to prevent retailers from hiking prices above a certain level. At the same time, central banks must refrain from raising interest rates too early amidst the post-COVID recovery. If the monetarists become overly anxious and raise rates rapidly, then the cost of borrowing increases, lessening the amount of currency circulating in the economy. Not only does this hinder GDP growth, but it also negates the continent's macroeconomic response to the pandemic. Such fiscal responses, including wage protection and poverty reduction, run counter to rising interest rates. However, certain countries, such as Mexico, Paraguay, and Peru, already plan to raise interest rates above their predetermined benchmarks. The countries play a perilous game: a mistake risks the depletion of any remaining trust in central banks.

But global fears of runaway inflation are mostly unfounded. The current period of inflation is merely transitory and will pass once the world economy smoothes out the remaining COVID-era bumps. Consumption frenzies are bound to fall, supply bottlenecks are bound to rectify, economies are bound to adapt. The pent-up consumption and shipping crisis will eventually disappear as societies return to pre-pandemic conditions. Besides, a moderate level of inflation conveys that consumers are confident in the economy and willing to provide sales to businesses. In principle, inflation is even a measurement of how fast the economy is growing. The public should start worrying about inflation only if it veers into untameable hyperinflation.

Thus, global fears of inflation -- while understandable given the unstable and new economic environment -- remain fallacious and misleading. Like the rest of society, the global economy faced turmoil during the pandemic and now struggles to restart amidst the lasting impacts of COVID-19. However, the underlying causes compounding inflation, such as a lack of affordable childcare and mistrust in central banks, are anything but temporary. Governments must act with intention, because — unlike Dollar Tree’s price increase — these problems threaten to rip the social and political quilt of nations.