Global Inflation: Causes and Implications

Global Inflation: Causes and Implications

It is not fair to say that merely global factors are responsible for global inflation, as domestic policies of various countries also contributed to it

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The very first and most precarious cause is a disturbance in the supply chain. In the last 3 to 6 years due to COVID-19 and the Ukraine war, the supply chain has been affected. According to the supply and demand concept, when the supply chain is distorted, the already prevailing products in domestic markets get their prices higher due to the augmented demand. For example, in 2022 ban on the imports of solar panels, led the prices to go higher in the domestic markets of various countries including Pakistan.

Increasing Inflation from 2022 to 2023

In addition, the rise in the prices of oil, an important commodity in the case of various countries, is another cause. In 2022 and 2023 oil prices went on increasing. Here the freight cost of all the goods relies on the oil.

Likewise, monetary policies of some economies, such as the US are ditto liable for global inflation. How? The dollar is an international currency. For instance, when the US announces its monetary policy with a high interest rate, its impacts are seen on the entire globe particularly, in the case of import-oriented economies. Soared interest rate lowers the dollar supply in the market and then create problems. For example, in 2022 a time rise in interest rate was recorded along with its impacts on the dollar rate.

Similarly, demand for raw materials is another cause. Going through the case study of China, it is clear that for higher growth maximum production is required. Again production is powered by raw materials. Let's say when China augments its demand for raw materials, the prices of raw materials are obviously soared. Ultimately, prices of final products go higher due to increased costs. Thus, higher costs lead to inflation across the World.

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In the case of import-oriented and loan-dependent economies, the exchange rate is another cause. Pakistan is a classic example of such economies where the impacts of loans and the exchange rate are seen more clearly. In a short period, the dollar reached 150 to 300 PKR. Ultimately, it soared in inflation as well as the amount of aggregate loans.

Global inflation has numerous implications. In 2021, global inflation was recorded up to 4 percent and in 2022 it was up to 9 percent.

Firstly, the cost of living becomes miserable and leads to poverty and food shortages.

Secondly, income and wealth inequalities have soared. How? In an inflationary period, wages are lowered. The producer to minimize his production cost, either fires the workers or lowers their wages.

An uncertain business environment is the very next implication. Investors and creditors whether individuals, organizations, banks, or companies always seek a stable environment or economy.

As inflation continues to soar, the interest rate of an economy ditto redoubles. This disturbs the economy by disturbing the circulation of money which has again linked with economic activities