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340
THE PROBLEMS OF INFLATION IN CURRENT GLOBAL ECONOMY
Anastas Ambartsumyan,
PhD, National University of Uzbekistan
named after Mirzo Ulugbek
Kadirov Azamat,
Student, National University of Uzbekistan
named after Mirzo Ulugbek
Abstract.
In the framework of the research, the main substance is provision
of the fact that inflation is, undoubtedly, one of basic macroeconomic categories,
which requires the use of rational and effective mechanisms to achieve quality
economic growth along with increase in public wealth. Presented some views of
economists on origin and specifics of inflation. The main purpose of this paper is to
comprehend investigation of inflation as well as to determine what kind of factors
influence on its current significant growth along with provision of analysis of trends
of inflation for certain period.
Key words:
inflation, consumer price index (CPI), producer price index (PPI),
aggregate demand, aggregate supply, money supply, GDP, output, cost-push inflation.
Today, the world faces a huge array of challenges including unprecedented
and catastrophic consequences of climate change, huge shrink of global GDP and
unexpectedly quick price growth issues. According to the estimates of The World
bank, global GDP growth is highly likely to plummet in many countries in the
world, especially in Europe and Central Asia because of high dependance on the
Russian Federation which is conducting special military operation in Ukraine as
well as supply shocks in most sectors of economy which are leading to high level
of inflation.
Therefore, probability of global GDP reduction is only rising, having already
shown 0.7 percentage points (to 3.5%), with the eurozone cut by 1.5 percentage
points to (3.0%) and the US by 0.2 percentage points (to 3.5%) decline in experts
’
prediction from Fitch Ratings in March 2022 and this intensifies sharp upward
revisions to inflation forecasts for the end of 2022.
Moreover, it should be taken into account that not only does Russian
military operation fuel worldwide inflation, make economic growth deteriorate,
but also post-pandemic recovery, price hikes of hydrocarbons and unprecedented
number of economic sanctions have undermined current living standards of all
around the world resulting in price jumps for consumer goods and services.
It would be more comprehensible to define primarily what inflation is, inter
alia to understand why situation with inflation is exacerbating, mention what
trends does inflation have now.
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One of widespread definitions of inflation is overall increase in average level
of prices, which implies that not all prices in economy must rise, yet some may be
stay at the same level, or vary in different directions and at different pace.
Currently, in September 2022 the situation with inflation is apparently
negative for global economy, for instance, in Eurozone, whereby the consumer price
index (CPI), main economic indicator used for measuring inflation has achieved 9.1
per cent in line with the highest level of 25.2% in Estonia for August 2022 from a
year ago, reaching 40-year high levels. The same is observed in other major
economies such as the USA where this index soared to 8.3% and the Great Britain to
9.9%, which is also striking the level of last energy crisis (Oil shock) of 1973-74.
Furthermore, the rate of producer price index, which calculates how price
of industrial products changes over a certain period, has shown skyrocketing
indicators for respective countries with the most considerable one in Eurozone
jumping up to 43.6%.
As of Uzbekistan, the CPI did not have such acceleration, yet showed some
gradual growth to 12.3% over the August of 2021. Recent trends regarding
inflation rate and how fast it has risen in aforementioned countries have been
illustrated in the figure 1.
* For August 2022, the indexes are computed for a year range.
Figure 1. Inflation rate (CPI) calculated in percentages for four regions covering
the period from 2010 to August* 2022
If we talk about the causes of current inflation, a crucial point would be the
view of great economist, Nobel prize awarder Milton Friedman, who recapped
about inflation in his famous quote: “Inflation is always and everywhere a
monetary phenomenon”.
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The Quantity Theory of Money based their notions on fundamental
equation which looks in the following way:
MV = PY
; where
M
is total amount of money,
V
describes transactions velocity of money,
P
is price level in economy
Y
is total output of economy (or in some cases, it is called the real value of
aggregated transactions).
If we take
V
and
Y
as constant components, this will mean that money
supply
(M)
is directly affecting the price level, or in other words change in amount
of money in economy would entail alterations in price index, which is used to
measure inflation.
However, assumption that
V
and
Y
are constant seems to be too strong, as
velocity of money
V
is widely considered unpredictable and real GDP
–
a proxy for
Y
–
has been variable over time. In most cases instead of money supply many
governments utilize M2 aggregate, which is sum of M1 (The total of all physical
currency + Checkable deposits) and Savings accounts + Money market accounts +
Retail money market mutual funds + small-denomination time deposits.
Furthermore, a fast growth of money supply plays an active role in inflation
and stems either from mistaken policies of Central Banks (in the US Federal
Reserve) or because such institutions overemphasize on fiscal requirements of
federal government and finances budget deficits through money creation. Clear
illustration of this in current state is lastly made changes of the Federal Reserve
in monetary policy of the USA.
First, to respond properly to COVID-19 pandemic and economic crisis, the
Congress of the United States has approved trillions of dollars of fiscal and
monetary support over a short period of time from 2020. The overall level of
economic stimulus has achieved more than 7 trillion dollars which comprises
around 30% of the US GDP as well as has reached approximately half of M2 of the
prepandemic level in the USA.
Figure 2, a plot of money supply (M2) of USD in the US economy, whereof it
can be inferred that money supply had accelerated substantially by nearly
5.5 trillion dollars or by about 40% in 2020 in comparison with 2018 figure and
then continued increasing moderately to the level of 21.75 trillion resulting in
more than half growth in M2.
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Figure 2. Money supply (M2) of USD in the US from 2018 to May 2022.
Left vertical axis reveals money supply in trillion US dollars, while the right
one shows change in money supply in percent, in relation to the 2018 figure.
Notwithstanding the fact that this huge and dramatic financial stimulus was
to bolster economic activity and push aggregate demand up along with impeding
unemployment to be the problem, the rate of M2 growth has not been at the same
speed as the growth of output (real gross domestic product), which fueled
inflation much. The index of output rise in the USA is depicted in figure 3. Thus,
the level of money in the circulation has become too abundant in comparison with
production rate of goods and services for the same period; thereby compelling the
latter category to achieve new equilibrium prices which will equate aggregate
demand and aggregate supply on the market.
Figure 3. Real gross domestic product index of the USA from third quarter
of 2019 to the first quarter of 2022
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Second, these trillions of dollars injected in the economy have influenced
significantly on not only the US economy but also the rest of the world, due to the high
dependency of global financial system on dollar; thereby exporting own inflation to
other regions. By most measures the dollar is dominant currency and plays an outsized
international role relative to the U.S. share of global GDP and it is dominant in
international transactions and financial markets, too (figures 4 and 5).
Figure 4. U.S. share of world GDP vs.
U.S. dollar share of international
reserves
Figure 5. Share of export invoicing
Additionally, expansionary policy of the Federal Reserve System (Fed) also
contributed much to inflation jump, since regulator had not raised its benchmark
interest rate, despite tremendous price rise tendency earlier. Only in March 2022 the
Fed made decision to raise interest rate by 25 basis points, which was the highest
growth since 2000. Nevertheless, some experts and economists support the idea that it
would have been better off if the Fed had started using its tough monetary tools much
earlier to avoid disastrous inflation we now face. “We’
re late a little. The sooner they
move the better” expressed Jamie Dimon, JP Morgan Chase chief executive o
fficer in
interview to the Bloomberg. He, also, added that the Fed may have waited too long to
raise rates.
Moreover, it is anticipated that the Fed will continue following the course of
tightening of monetary policy to combat high inflation and restore stable market prices.
This cause is to blame for the European Union, as well. The union even made things
worse while pending with the interest rate hike until the second part of July 2022, when
euro fell in such a way that became equal to dollar value, after that Christine Lagarde,
the President of the European Central Bank, announced new approaches to stabilize
prices and markets involving shifts in monetary policy in euro area, raising interest rate
by 0.5 percentage points, eventually abandoning eight-year spell of negative rates.
Иқтисодиётни рақамлаштириш
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Another actual problem, the whole world suffers from disruptions in global
supply chain and high prices of raw materials, especially for energy resources which are
the main reasons of inflation in some parts of the world. These reasons refer to cost-
push inflation. For example, because of tough economic sanctions on most sectors of
Russian economy involving turning Russian banks of SWIFT off and sanctions on
energy sector deteriorated the situation since Russia supplies around one-tenth of the
world
’
s energy, including 17% of its natural gas and 12% of its oil [2]. The higher is the
price of hydrocarbons in the market, the higher is the costs for either businesses to
produce goods and services or consumers who will obtain pricey cheques for utilities.
In figure 6, it is obviously seen how prices of two oil brands, WTI Crude and Brent
Crude, have developed over the last year.
Figure 6. Oil prices on the global market
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The same trends are observed with natural gas market in Europe, where the
price of 1000 cubic meters of natural gas achieved the point of 3500-3600 USD
dollars by the end of August (figure 7).
Figure 7. Natural gas price in European market
Another factor ought to be also considered for natural gas market that
Russia first cut its gas supply through pipeline Nord Stream-1 to 20% of its
capacity, then in September totally halted the supply, because of technical issues
with pipes and sanctions imposed by German multinational conglomerate
Siemens AG, which provided technical maintenance of the pipeline. It, therefore,
fuels acceleration of price of resource on energy market.
In conclusion, inflation is one of the most painful and dangerous
phenomena that negatively affects financial and monetary systems specifically
and the whole economic system generally. Inflation entails not only a decrease in
purchasing power of money, but also undermines the possibilities of effective
economic regulation, devalues efforts to restore broken proportions and
structural transformations and is the root of social instability and radicalism and
fuel for recession. Consequently, without proper actions to slow down inflation,
politicians and national authorities put in peril their prior efforts of developing
and modernizing their homelands.
References
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Region, p. 3 URL: https://openknowledge.worldbank.org/handle/10986/37268
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Ratings-London-21 March 2022 URL: https://www.fitchratings.com/research
/sovereigns/world-growth-forecasts-cut-as-inflation-intensifies-due-to-war-21-
03-2022
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