These days, after many years, inflation is back as a central topic of discussion for governments, businesses and individuals. Media reports across the globe talk of central banks tightening monetary policies and hiking interest rates to protect their economies. As inflation rises, financial and other markets face another aspect of uncertainty and the end is still not on the horizon. What does all this mean and why is it important?
Why?
The issues that began with supply chain issues attributed to the Covid pandemic have now continued and taken a new form with the escalation of global tensions during this year. Simply put, the conflict has created shortages of many essential commodities, such as grains, minerals, petroleum, natural gas etc. across the globe, as supplies from the biggest exporters decline.
As markets anticipated and experienced supply declines, the prices of these commodities continued to increase. The snowball effect continues as this increases the production and transport costs of numerous finished goods which translated into an increase in consumer prices High inflation occurs when these parameters are no longer under control and central banks must intervene with measures of monetary policy. Moreover, some experts, like the head of global macro research at ING Bank, Karsten Brzeski, believe at this point there is a risk of stagflation, which occurs when there is both a high inflation rate and slow or negative economic growth. As he pointed out, stagflation is the biggest challenge for central banks to deal with.
Inflation around the globe
All over the world, countries are seeing record inflation rates. For example, in the eurozone, the inflation rate reached 7.5%, the highest level since the euro was launched in 1999. The framework projection for inflation rates in the OECD area for 2022 was 2.75-3%, while actuals show 9.2% in May. This is the highest measured rate in the OECD area since 1983 and is just a milestone in the negative increase trend, mostly due to the increase of inflation in food.
Other countries are also facing high inflation rates. The United Kingdom, for example, recorded the highest inflation rate since 1982 of 9.1% – measured in March, the highest value since 1982. All G7 members endured an inflation rise, with Germany experiencing the highest jump, from 2.1% to 7.3% – a percent not seen since 1981. These are just some examples.
Serbia
The Serbian overall inflation rate reached 9.1% in March, while it was 10.4% in May. The May inflation report of the National Bank of Serbia states that the inflation rate is expected to decline in the second part of this year, while a return to the 1.5-4.5% range is expected at the end of 2023. Reasons for optimism can be found in the new agricultural season, which should reflect in lower prices of fruits and vegetables and the positive effects expected measures to provide.
The reaction of central banks
To deal with the consequences of high inflation, central banks around the world have started tightening their monetary policy. Raising benchmark interest rates is the most common method central banks use to curb inflation.
Namely, the European Central Bank announced an increase in the benchmark rate from -0.5% to -0.25%, notwithstanding additional increases in September if the inflation rate calls for them. The ECB has been cautious with rate hikes, introducing its first after 11 years, amid fear of a recession in the eurozone. The US Federal Reserve has launched a more aggressive rate hike between 0.75% and 1.0%. Similarly, The Bank of England increased the benchmark rate from 0.75% to 1.0%. In Uruguay, the benchmark rate reached 9.25%.
The National Bank of Serbia is keeping up with the trend. Although the projections in the May report on inflation are moderately optimistic, corrections were introduced and the National Bank of Serbia increased the benchmark rate in Serbia to 2.75%.
The NBS believes that disturbances in the domestic monetary system are affected by global movements and international flows to create an optimal domestic monetary policy. As elsewhere, opinions always differ as to the appropriate timings and effectiveness of the measures.
Although central banks are pinning their hopes on the currently imposed economic measures on a global level, inflationary pressures have not been significantly reduced. If their influence continues, or worsens, further growth of benchmark rates can be expected which would mean many other problems for the population and the economy, but also the need for correcting behavior and business in the future.
Authors: Miloš Petaković, Teodora Ristić
