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"Inflation continues to hike, primarily due to external causes, with prices arising throughout the economy."
Impact of Inflation
As a consequence of the global pandemic, which ultimately disrupted the supply chain, record amounts of government fiscal stimulus, strikes in consumer spending, a reduction in labor force involvement, and ongoing business uncertainty, US inflation has reached its highest level in over 40 years.
High inflation, growing interest rates, unstable economic activity, and unpredictable markets have elevated the possibility that the US economy will fall into recession. However, these expectations range from a remote possibility of a recession — typically defined as an economy contracting for two consecutive quarters — to more firm predictions that a downfall is nearby. Meanwhile, forecasters continue to lower their growth projections. The World Bank reduced its global GDP growth forecast for 2022 to 2.9 percent in June, down from 4.1 percent in January.
Rising energy and food costs, the consequences of the Ukraine war on supply and trade, and rising policy interest rates aimed to reduce inflation are all contributing to the shrinking of growth forecasts. In response to the alarming rise in inflation, central banks throughout the world are raising basic bank lending rates. Until now, however, increased rates in most of the countries have not kept pace with inflation.
Could Inflation Contribute to a Recession?
Recession, a significant decline within economic activity, eventually lasts for months or even years. A recession is declared as soon as the country's economy perceives negative GDP, rising unemployment, declining retail sales, and contracting measures of income and manufacturing over a prolonged period.
However, several Fed governors encountered a bit of a tricky balancing act, demanding to increase interest rates aggressively to reduce inflation without triggering a US recession. The Fed approved 0.75 percent increase to its standard interest rate, the notable shift since 1994. In July, the Federal reserve is clearly on its way to make further sharp hike regarding interest rate and possibly in September, too. Growing interest rates raise the cost of borrowing for businesses and individuals, impacting on economic activity.
Food Inflation: Rising at High Pace
Surprisingly, food costs have been growing for a longer period, owing to a faster economic recovery from the pandemic in US. It has also been increasing mostly across categories, indicating widespread inflationary pressures in the economy.
The leading inflation figures are becoming more similar—around 8% in both the United States and Europe—but the reasons, effects, and treatment remain considerably different. The United States, in particular, has greater underlying inflation, which is possibly more persistent and is being dealt correctly with vigorous monetary tightening.
Currently, prices are far higher than during previous price surges in 2008 and 2011, which were triggered by the disruption of the global financial crisis. Prices have fallen significantly in the decade since. Furthermore, the Ukraine war has driven food prices to an exclusively new level.
Additionally, prices for electricity, gasoline, and petroleum-based agricultural inputs increased early this year. However, oil has begun to fall back to pre-invasion levels this week as traders brace for a major decline in demand. However, food inflation remains persistently high. As per the Bureau of Labor Statistics, cereal, bread, and chicken costs soared 14.2 percent, 10.8 percent, and 17.3 percent, respectively, on an annual basis.
Source: McKinsey & Company
Risks Ahead
Global factors including Russia's war with Ukraine, the continuing pandemic, and the possibility of Chinese shutdowns will have an influence on US economic trends. Furthermore, the longer inflation is high, the greater the chance that inflation expectations rise, which feeds back into wages and prices. In such an event, the Fed would need to adopt more aggressive measures to reduce inflation, such as hiking interest rates and maintaining them higher for a longer length of time. This would reduce growth even further and increase unemployment.
Source: IMF
Shaping a new era of progress : A Roadmap to Recovery
The current geopolitical and economic climate might portend a perfect storm, necessitating quick preventive action. Managing the consequences of inflation across a diverse operational landscape demands a cross-functional, disciplined, and agile approach. Every increase in inflation is paid for by someone, somewhere. Therefore, decision makers should not put off implementing winning approaches. These include re-evaluating current methods of operation, actively planning for upcoming problems, and building in the ability to respond quickly to an uncertain future.
Customers pay greater pricing at the end of the supply chain. Suppliers benefit when their clients reduce manufacturing risk by looking for alternatives to their products. Shareholders suffer increased costs as a result of competing and operating a profitable firm.
The greatest CEOs will effectively manage the effects of the present higher-inflation climate and develop a new degree of organizational resilience regardless of where prices move next with an appropriate playbook as a guide. To further enhance medium to long-term growth, the US government may develop fiscal policies to invest in labor-force reforms, enhance productivity, and stimulate innovation and investment.