What is inflation?
In each country, a basket of basic goods and services is determined (housing, travel, food, footwear and clothing, electricity, etc.). Every month we examine the change in the total price of the basket, if it has increased, then it is an increase in inflation, and if it has been reduced, then it is a decrease in inflation (deflation). Most central banks worldwide aim for an inflation increase of about 2 percent per year. This is a reasonable increase in a healthy economy growing by a few percent a year.
Why has inflation jumped in the past year?
Over the past decade, we have seen almost zero inflation, but in the past year, inflation in the US has soared to a 40-year high of 9.1%! The main reason for this is the impact of the lockdowns at the beginning of the coronavirus. During this period, many production activities were closed, but pretty quickly, everything opened up, and the demand in the world increased. Because there was not enough production capacity to meet the demand, commodity prices soared. The conflict in Ukraine and the sanctions imposed on Russia gave an extra push to energy prices and some commodities. All these things permeated the prices of final products, and here is the explanation for the high inflation we see worldwide.
Scary, but what will happen in a year?
It is important to understand that inflation is a delayed indicator; that is, it tells us about the past, not what will happen next.
In order to understand what will happen next, let’s look at the chart below, which describes inflation in the US. It is easy to see that every time inflation soared, it very quickly collapsed downward, and this time too, it can be assumed that this will happen.
As evidence, the prices of most goods have already gone down, some even to the price levels that existed before the coronavirus outbreak.
The recession in the US will also lower demand and push commodity prices further down. It will take time for these declines to translate into declines in the prices of final products (because manufacturers and sellers raise and lower prices with delay), but it will come. Therefore, this time too, the inflationary surge is expected to be short-term, and you should not be too frightened. Inflation impacts the interest rate in the economy and our loans and those of our companies, so curbing it is good news for all of us.