02 Jul 2021
Posted in Business Fundamentals
Governments must ensure global economic recovery is sustained amid rising inflation rates, says GlobalData
Economic recovery is picking up pace in major economies accompanied by rising prices as production units are struggling to keep pace with the ever-rising consumer demand. GlobalData, a leading data and analytics company, forecasts inflation rates will rise in the US (by 2.5%), UK (0.9%), Germany (2%), Russia (1.6%), Brazil (2.7%), and Canada (1.5%) in 2021 over last year.
The US’s economy witnessed the highest year-on-year (y-o-y) surge of 5% in May 2021. The rise in used car and truck prices was the major contributor to the increase in the consumer price index (CPI), with a roughly 30% increase when compared to the same period last year, according to the Office for National Statistics (ONS).
For the UK, prices increased sharply from 1.5% in April 2021 to 2.1% y-o-y in May 2021, which is the highest rise in the past two years, and it soared over the Bank of England’s (BOE) inflation rate target as the country continues to recover from COVID-19 restrictions. Russia also witnessed a spectacular rise in inflation rates to 5.9% y-o-y in May 2021 from 5.5% in April 2021. Demand-side and supply-side inflationary factors pushed up the annual rate of CPI inflation in major economies.
Shruti Upadhyay, Economic Research Analyst at GlobalData, says: “Soaring inflation rates has led to a hike in interest rates with the adoption of the hawkish monetary policy by central banks in countries such as Russia, Brazil, the Czech Republic and Hungary, in order to increase savings resulting in lower disposable income. The vast monetary stimulus launched in response to the pandemic has led to a rise in purchasing power supported by pent-up consumer demand that is outpacing supply and causing shortages and price spikes.”
With economies reopening after a year of lockdowns and social distancing measures, the rapid increase in consumer demand, especially for airlines and hotels, led to a rise in higher air fares and hotel prices. According to Eurostat, travel demand in Germany led to a whopping 685.5% (y-o-y) rise in air passengers transport in April 2021. The resumption of various economic activities and vaccination drives have boosted demand for crude oil, with oil prices reaching multi-year highs.
However, rising inflation rates is also a cause for concern for governments as it leads to higher expenditure on unemployment benefits and pensions to support the economy during the pandemic. Lower purchasing power and higher interest rates could discourage borrowing by businesses, thereby disrupting economic and financial activity. To beat future prices, consumers will increase buying now, and with higher inflation expectation, the economy could swiftly jump into a wage-price spiral.
Upadhyay adds: “Central banks have the crucial task of balancing the upcoming economic recovery, while limiting inflation and speculation about rising interest rates. A contractionary monetary policy will also prove to be beneficial in curbing the inflation rise, however, this comes at a cost of slower growth. Reducing inflation by implementing policies that support macroeconomic stability and holistic growth may ensure a faster and sustained global recovery.”