An Overview of Inflation
What is inflation?
Inflation is commonly defined as the rise in the cost of goods and services. In order to measure the rate of inflation, economists use the Consumer Price Index (CPI), which consists of a collection of frequently purchased products and services.
What causes inflation?
Prices rise when the economy’s demand exceeds supply. Inflation may also increase when individuals and businesses have access to more money. Lower interest rates and increased government spending can both lead to people having more money.
The worldwide economy suffered greatly following the financial crisis of 2008, and as a result, global inflation rose. Furthermore, inflation has been rising in several nations prior to the war, primarily to supply-demand imbalances during the pandemic, forcing monetary policy tightening. In this setting, the war will affect economic development and increase inflation, in addition to its tragic impact on the citizens. Moreover, the latest lockdowns, especially in China may result in new constraints in global supply chains.[1]
Who is Affected by Inflation?
Inflation of today affects not only the developing economies and the emerging markets, but also has a strong impact on the majority of people. After the pandemic lockdowns took place and now the war in Ukraine, inflation rates have risen to their highest levels in decades in several countries while economic forecasts are quickly diminishing.
As a consequence, the gas and oil sector is one of the most affected, followed by those of wheat and fertilizers, pushing energy and therefore food prices higher, especially in Europe. Therefore, while millions of people have to choose between heating and eating, gas providers have made record profits.[2]
According to Eurostat (the statistical office of the European Union), the annual inflation has increased from 5.9% in February to approximatively 7.5% in March 2022 in the Euro area.
Source: Eurostat
As it can be seen, energy is expected to have the highest annual rate of inflation, followed by food, alcohol and tobacco, non-energy industrial goods and services.
In this setting, it is clear that the rise of the global inflation reflects the effects of the COVID-19 and of the war and this will exacerbate inequality both within and between countries.
[1] Martin Feldkircher, Pierre L. Siklos, ‘Global inflation dynamics and inflation expectations’, International Review of Economics and Finance.
[2] Simon Gilchrist, Raphael Schoenle, Jae Sim and Egon Zakrajsek, ‘Inflation Dynamics during the Financial Crisis’, American Economic Review 2017.