Skip to main content

Global Inflation and International Trade

Inflationary pressures have increased across the globe in recent years, but the rate of change is not uniform. In the euro area, for instance, prices outside energy and food have risen at a rate of 3.5%. In the United States, prices outside energy and food have risen at a rate of nearly 50% higher than in the euro area. But, this is not the first time that inflationary pressures have varied across regions.

Inflation can harm economies. It prevents consumers from making purchases and reduces incomes for producers. Deflation, meanwhile, has led to prolonged periods of deflation in Japan, where prices have fallen below the rate of inflation. As a result, the US Federal Reserve, along with other central banks, has instituted monetary policies to avoid deflation.

The Federal Reserve is preparing to raise interest rates again in an effort to tame rising prices. Rising energy costs and supply chain clogs are among the reasons why prices are increasing globally. Earlier this year, the Organization for Economic Cooperation and Development (OECD) estimated that few countries would see inflation rates higher than 6 percent this year. The exception to that was Turkey. However, the country was already grappling with runaway inflation, unrelated to the pandemic.

Inflation is measured using two indexes: the Consumer Price Index and the Wholesale Price Index. These indexes measure changes in prices before they reach retail levels. Each index covers a wide range of items at different levels. Inflation affects prices of certain commodities, such as food grains, metal, electricity, and transportation. And it can even affect prices of certain services like health care.

As wages increase, businesses increase their prices to compensate for this higher cost. This is called a "wage-price spiral" - a spiral that is hard to stop once it starts. Wages are the largest cost for most companies in the service sector, which makes up a large portion of the economy.

The emergence of high levels of inflation in many advanced economies has triggered policy discussions. The problem is that these policies were not effective enough. As a result, the challenge now falls to the major central banks, which may have the power to do something about high inflation. The problem is that a modest tightening is unlikely to have any significant impact. In the 1970s, the US Federal Reserve often did too little, too late.

Monetary policy is a key factor in keeping prices stable. Central banks were slow to recognize that rising prices were not temporary and needed higher interest rates to restrain demand. Inflation is a major cause of economic instability, and monetary policy cannot ignore it. As a result, the failure of the 1970s led to the second-deepest recession in post-war history and a debt crisis in developing nations.

The Federal Reserve is currently weighing domestic and global factors before deciding on whether or not to raise rates. Increasing costs in global supply chains and rising commodities prices have contributed to soaring prices around the world. For instance, global oil prices were up 55 percent in the past year and nickel used in automotive production is up 27 percent.

www.sba.tax

Comments

Cloud Bookkeeping

HS2 cost cuts new routes and add delays.

 Trans­port depart­ment offi­cials have begun work on «Project Sil­ver­light» sug­gest­ing the high­speed rail scheme might face four addi­tional years of delay. The planned High Speed 2 rail line faces fur­ther delays of up to four years and more cuts to the project under plans being drawn up by min­is­ters to rein in its bal­loon­ing costs. The extra delays to the coun­try’s biggest infra­struc­ture project would mean that it would not be com­pleted until as late as 2045 — 12 years after ori­gin­ally planned. «This is a func­tion of infla­tion; we are hav­ing to find huge sav­ings because the cost of everything the depart­ment is already doing will have become so much more expens­ive by then,» said one gov­ern­ment offi­cial. In Octo­ber, the FT repor­ted that the Treas­ury had asked HS2’s man­age­ment team to identify poten­tial cuts or «scope reduc­tions» to the high-speed line. Trans­port depart­ment offi­cials have sub­sequently begun work on Project Sil­ver­light aimed at fi...

Doubt on CS's collateral.

  Credit Suisse provided an emergency $140mn loan to Greensill Capital based partly on invoices to companies that deny ever doing the business stated on the documents. The Swiss bank provided the loan in October 2020, less than five months before the collapse of Greensill, a supply chain finance firm that counted former British prime minister David Cameron as a senior adviser. Invoices issued by metals magnate Sanjeev Gupta’s Liberty Commodities and sold to Greensill formed part of the collateral for the loan, according to documents seen by the Financial Times and people familiar with the transaction. Yet several of the parties named on the invoices have told the FT they did no business with Liberty. GFG has consistently denied any wrongdoing. Credit Suisse’s loan had a clause dictating that the collateral value had to be equal to or greater than the $140mn borrowed. The terms of the debt agreement only allowed invoices on Green-sill’s balance sheet to count towards this tally if t...

Tax cut

  Sterling tumbled against the dollar to below $1 . 09 ,  hitting its lowest point since 1985 ,  after UK chancellor Kwasi Kwarteng unveiled a £45bn debt-financed tax-cutting package that sparked a historic increase in borrowing costs .  Kwarteng’s political and economic gamble includes the biggest set of tax cuts for 50 years ,  with the end of the 45p additional rate for the highest earners as well as a sharp reduction in levies on dividends .  But concern over the amount of debt required to finance the tax cuts triggered a frenetic day of trading that raised doubts on whether Britain’s new economic approach was sustainable .  «Britain will be remembered for having pursued the worst macroeconomic policies of any major country in a long time» . Kwarteng has staked the political fortunes of the Conservative party on the bet that the radical tax cuts and deregulation will raise Britain’s sluggish growth rate to 2 . 5 per cent .  «This is a new appr...