Inflates rates pressurized or Deflation, the era of stable rates is past tense
Inflation Rate Background
According to International Monetary Fund, inflation rates measures how much more expensive a set of goods and services has become over a certain period, usually a year. In 1974, U.S. President Gerald Ford declared inflation as No. 1 public enemy to the country’s economy.
Long-lasting episodes of high inflation are often the result of lax monetary policy. If the money supply grows too big relative to the size of an economy, the unit value of the currency diminishes. In other words its purchasing power falls and prices rise.
A higher inflation rate means lower purchasing power. In normal conditions, the average inflation rate should not exceed 2% per year.
Hyperinflation means when monthly inflation exceeds 50%. The worst example of hyperinflation is Venezuela, which was among the top countries with the highest inflation of 80,000% per year in 2018. On the contrary, deflation is the scenario where rates go below the line to the negative territory, prices drop and money flow slows down rapidly. Burundi recorded -8.4% in October 2018 while Ecuador was -1% in April 2018.
2019 Inflation Rate Statistics
In 2019, global inflation rate stood at 3.41% compared to 3.62% recorded in 2018. Post the 2008 global financial crisis, major economies across the world have suffered immensely thus leading to almost 6.4% increase in 2008 inflation from 2007 levels.
For the year 2019, Argentina inflation rose 53.8% as consumer prices in healthcare, communications, home equipment and maintenance and food rose rapidly. The figure is the third highest in the world with crisis struck Venezuela and Zimbabwe ahead. Argentina has been in recession since 2018 with 90% of GDP accounting for public debt.
Venezuela and Zimbabwe recorded highest inflation (annualized) rates of 282972.8% and 175.66% respectively while South Sudan (56.1%), North Korea (55%) and Argentina (54.4%) followed the list. IMF head of delegation Gene Leon said weakening confidence, policy uncertainty, a continuation of forex market distortions, and a recent expansionary monetary stance has increased pressure on the exchange rate in Zimbabwe.
Post COVID-19 Inflation scenarios
In March 2020, Sudan’s annual inflation rate rose to 81.64% (second highest in the world), up from 71.36% in February mainly due to high food, drink and fuel prices. On the other hand, Zimbabwe inflation rate soared to 676.39% from 540.16 in prior month.
U.S. core consumer price index, which excludes food and fuel costs, fell 0.4% in April — the largest monthly drop since the government began compiling the data in 1957. China’s inflation rate in April slowed down with a year-on-year rise of 3.3%, but 0.9% lower than in March.
Store closures led by the coronavirus outburst and the imposed freeze majority of consumer spending areas make it difficult to calculate accurate inflation data thereby creating a gap in policymakers’ ability to effectively manage the economy.
Also, these introduced measures have created massive supply-demand imbalance in the market which is likely to have a impact on the economy for the upcoming few years. Consumer demands for not only food, entertainment and travel would be low but also falling requirement of office spaces, low utilization of hotel rooms, restaurants would dampen the broader economy heavily.
Notably, people in this troublesome scenario would save more than they would ever have, and thus a cap on spending would dent worldwide economies. They would maintain a cut-off point between “like to have” and “need”.
Despite the Federal Reserve and central banks infusing liquidity and relief packages in the economy to maintain inflation levels, it is believed that a massive deflationary shock is awaiting the world.
Industry Experts Opinion
Fixed income Chief Investment Officer, Dominick DeAlto, believes that for the longer term (18 months from now) there could be inflationary pressures but in the near term deflation is the main risk for major global economies. A few reasons to drive the same – declining oil prices leading to low CPI, already reported lower monthly PPIs, companies offering heavy discounts to sell off inventory and raise cash.
A major factor is also wage disinflation – almost 30 million jobs lost in the U.S. is equivalent to an entire decade worth of gains. Companies are now planning to reduce wages to cushion their cost structures. This would lead to lower production prices and thus lower retail prices and largely having a negative impact on inflation psychology.
Gary Smith, Managing Director of Sovereign Focus and a Consultant for Tabula Investment Management, believes that whichever be the viewpoint – medium-term inflation rates of 10% or higher or heading into deflation – the era of stable inflation rates has come to an end.
He says that whoever is predicted whatever – inflation or deflation – they do not expect a V-shaped economic recovery. They believe that the quantum of falling demand cannot match the excess supply for the upcoming few months at least.
Also, flattening the curve of Covid-19 infection is more consistent with an L-shaped economic recovery. With slow easing down of lockdowns across the globe, it can only give temporary oxygen to the still restricted spending. The “manage but prolong” scenario would not lead to a day when there is a sudden splurge in spending