Sunday, 24 October 2021 07:55 GMT

Rising Inflation Sparks Fears of Economic Weakness across the World

(MENAFN- WieeMedia Inc.)

As the COVID-19 pandemic shifted in the rear-view mirror due to rising vaccination, other concerns resurface, the most predominant one represented by rising inflation figures around the world. Although policymakers have been struggling to stimulate inflation since after the 2008 financial crisis, it isn’t exactly what they were looking for, given the current surge in prices is mainly driven by supply issues.

Higher costs combined with sluggish wage growth and still elevated unemployment around the world make up for a potentially disruptive mix, which could result in slower economic growth, plus higher social unrest, given the wealth gap continued to widen.

US inflation is still elevated

Based on the August figures, US inflation remains at a 30-year high and near-term prospects remain uncertain, considering supply bottlenecks are expected to persist over the upcoming months. For decades companies have outsourced production to places where labor and commodities costs were low.

Due to COVID-19, commodity prices have risen substantially since Q1 2020 and at the same time, countries like China, Vietnam, or Malaysia are now struggling to cope with rising demand for their products coming from the West.

According to Federal Reserve Chairman Jerome Powell, high inflation could last into next year due to shortages. Using financial trading apps, people have been heavily involved in assets like stocks or commodities, yet as prices are weighing on consumers, this could start to have a negative effect on the economy and asset valuations, considering companies can’t pass higher costs to consumers, impacting financial projections for the near-term.

Europe suffers from record energy prices

Things are even more concerning in Europe, where energy prices are pushing inflation upward in Germany, France, UK, or Italy. The Southern region seems to be the most affected, while a temporary easing can be spotted in the North. Dependent on imports, the pressure is expected to persist as the winter is approaching, with prospects to be further dampened if the weather will turn out to be colder than expected.

Same as in the USA, higher inflation weighs on consumer sentiment and elevated energy prices are impacting businesses and their productivity. So far, the European Central Bank sticks with the “transitory inflation” narrative, while the European Council will hold talks about the energy crisis in late October.

An economic slowdown on the horizon

Consumption remains a key driver of economic activity and as prices rise, people will need to cut down spending in order to maintain a decent standard of living. The recovery from the pandemic is still underway, with lots of jobs needed to be created until 2019 levels will be reached.

Higher inflation acts as a headwind and raises uncertainty for the months ahead, especially if policymakers will not take decisive actions. Central banks are starting to normalize monetary policy, the fiscal stimulus is ending, but despite that, the problems come from the supply side, and productivity can’t be bought by printing money or increasing spending.

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