Central banks usually use their monetary policy tools to stimulate the economy when it is sluggish, and to slow things down when the economy is about to overheat. Things become tricky, however, when those banks face a perplexing situation as the one they are facing today: they have already waited too long before raising rates. Inflation is high, and to bring it down they must cause a recession.
Are interest rate hikes even working?
One study has shown that inflation has not been tamed even in countries where central banks did raise rates early on. This means that the issue of inflation is more complex and is not related to just the billions or trillions of dollars spent by governments to stimulate their economies. There are other factors causing inflation such as the higher energy prices, which have spiked after Russian tanks entered Ukraine.
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For example, crude oil - which you can trade with a reputable broker like Easymarkets - has been trading at around $90. Another factor might be the higher food prices, which have been rising for several years now. All those factors combined, in addition to the disruptions to supply chains during the pandemic, are responsible for the high inflation figures we are witnessing now.
Inflation in the US goes down slightly, but this is not the time to be complacent
Recent figures released in November show that inflation in the US in October stood at 7.75%, compared to 8.20% in the previous month and 6.22% last year. Those figures are better than expected, and they have certainly caused a relief. Investors leaned toward selling the US Dollar, which means they were not so inclined to seek the safety of the greenback. And while this decrease in inflation is certainly welcome, there is still a lot of work to be done. Inflation is still higher than the long-term average of 3.27%.
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Will inflation be a persistent problem?
Those levels of inflation are not good for households or businesses. They dampen economic activity overall, and the expected rate hikes cause asset prices to drop. Equity markets have already shed billions of Dollars’ worth of value in the recent downturn. The situation can improve, should inflation return to its average values. However, some analysts believe that this may not actually happen soon.
Some experts expect that inflation will be a long-term problem. Perhaps the inflation rates will stabilize at around 4 or 5 percent after a while. One factor that can bring inflation down is higher unemployment, but employment figures in the US are still strong. Thus, at least for now, it is unreasonable to expect inflation to go back to its levels before the war in Ukraine and before the pandemic.
Conclusion
The recent drop in inflation is a reason to be optimistic, but not overly so. The global economy is going through many adjustments. The first is the shift towards greener economies. The second is the recovery from the pandemic and its aftermath, which includes deep disruptions to supply chains. The third is the change in consumption patterns. Those transitions must be managed well. If not, more economic trouble may still lie ahead.
