A 9.1 percent increase in US consumer prices in the 12 months ending June 2022, the highest in four decades, has made for plenty of headlines.
Meanwhile, in Germany and the United Kingdom – countries with comparable economies – annual inflation was almost as high: 7.5 percent and 8.2 percent, respectively, in the 12 months ending in June 2022. In Spain, inflation has reached 10 percent.
US policies seem to have led to this situation, but economists like myself doubt it because inflation is everywhere, with few exceptions. Rates averaged 9.65% through May 2022 across the 38 rich countries in the Organization for Economic Co-operation and Development.
What drove those price increases starting in early 2021?
Scarcity put pressure on prices everywhere
With the onset of the COVID-19 pandemic, demand for computers and other high-tech goods soared as many people shifted from working in offices to clocking at home.
Computer chip makers struggled to keep up, resulting in chip shortages and higher prices for a dizzying array of devices and machines that need them, including refrigerators, cars and smartphones. On the same subject : More people are relying on food pantries as food prices rise.
It’s not just chips. Many of the goods Americans consume, such as cars, televisions, and prescription drugs, are imported from all corners of the world.
Supply chain strains
In addition to problems related to changes in supply and demand, there have been major disruptions in how goods move from manufacturers to consumers in what is known as the supply chain. This may interest you : Colombia-based suppliers, food trucks feel effects of inflation, supply chain.
The disruption of freight, whether by ship, train or truck, has hampered the delivery of all kinds of goods since 2020. This has resulted in a significant increase in the cost of shipping goods.
These major delivery disruptions have exposed the disadvantages of the popular just-in-time inventory management practice.
By having access to the materials needed to make their products, companies are less vulnerable to shortages and transportation problems. And when manufacturers can’t make products fast enough, shortages occur and prices rise.
This approach, especially when it involves reliance on remote suppliers, has left businesses much more vulnerable to market shocks.
Labor complications
The onset of the pandemic also sent shock waves through labor markets, with lasting effects. Read also : Netflix’s program to fix the payment crisis began in Asia.
Many companies laid off or laid off large numbers of employees in 2020. As governments began to ease pandemic-related restrictions, many employers found that large numbers of former employees did not want to return to work.
Whether these workers chose to retire early, seek new jobs that offered a better work-life balance, or become disabled, the results were the same: a labor shortage that required higher wages to hire replacements and retain other workers.
Again, all of these dynamics are happening all over the world, not just in the US.
War in Ukraine compounded these woes
Russia’s war on Ukraine, which officially began on February 24, has also fueled inflation, disrupting global supplies of fuel and grain.
The effects of the conflict are reverberating around the world and fueling inflation.
Russia is the world’s second largest exporter of crude oil. Sanctions against Russian imports, in retaliation for Russia cutting off oil shipments to European countries, have disrupted the global oil market.
As Europe buys more oil from the Middle East, demand for oil in that region increases, driving up prices. They went from $101 per barrel at the end of February to $123 a month later. Prices remained high for several months, but by the end of July they were back around $100 a barrel.
Food prices have risen sharply in the US and elsewhere as a result of this conflict. Ukraine has some of the most fertile soil in the world and is the third largest exporter of corn.
Russia’s destruction of Ukrainian crops and the blockade of Ukrainian exports has led to a sharp increase in the prices of agricultural products worldwide.
How will the world respond?
Support for globalization and international trade has waned in recent years. With supply chain disruptions and the war in Ukraine fueling inflation, this trend is likely to continue.
However, as an economist, I believe that the benefits of free and open trade still outweigh the current challenges.
In my view, there is nothing fundamentally wrong with globalization that cannot be fixed. But, like taming inflation and easing supply chain bottlenecks, it will take time.
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