Context: Inflation has suddenly become a major global problem. However, inflation is one of the least understood phenomena within economics and requires much more research.
Many major and small countries of the world, like the US, Turkey, South Korea, EU, Bangladesh, and Sri Lanka are facing the problem of inflation. However, fine-tuned management of inflation is a missing aspect of economics.
What are the reasons behind rising inflation across the world?
Supply-chain disruptions triggered initially by the covid pandemic and now by the Ukraine war are the major reasons.
The price rise of Food and energy products is a major reason behind eurozone inflation.
The rise in aggregate demand was caused by the largest government spending packages in American history.
In the case of emerging economies, mainly demand-driven inflation is the major cause. Furthermore, due to unevenly skewed inflation across goods and services, a mere exchange-rate correction cannot work.
Due to globalization, central banks seem relatively ineffective in tackling today’s inflation. It is because of the easy flow of goods, services, and capital from one country to another country.
Thus, If one country tries to control inflation by raising interest rates, money will flow into that country, causing its exchange rate to appreciate and dampen exports.
What should be done to manage inflation effectively?
We have enough examples of preventing major hyperinflationary episodes, like the record-breaking cases in Germany in 1923 and Hungary in 1946, and in parts of Latin America and Africa in more recent times. This knowledge can be used cautiously.
Better global coordination of monetary policy is essential.
Source: This post is created based on the article “Rising inflation cannot be fought well without global coordination” published in Live Mint on 4th May 2022.