July 6, 2022

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When inflation meets economic stagnation

The media spread the word (stockfilation), which is synonymous with stockfilming, doubling the price, job losses and pictures of cars queuing at petrol stations. While the term refers to a sharp rise in prices with job losses, economists have used the term more widely to refer to a period when inflation is higher than the central banks’ target with negative effects on economic growth.
The World Bank gave a dark picture of the global economy in its report released last week, and predicted that global growth would slow to 2.9% in 2022, after reaching 5.7% in 2021. In emerging economies, per capita income is expected to decline by 5% this year. In developed economies, growth is expected to slow to 5.6% from 2.6%, while in emerging and emerging economies, growth is likely to slow to 6.4% from 3.4%, the lowest level in decades, reaching 4.8%. The World Bank expects inflation to fall next year, but it will exceed inflation targets in many countries, and continued inflation will lead to a contraction of the world economy. Higher inflation rates are detrimental to the economy and put pressure on the budgets of individuals and households, which in turn reduces consumer spending, weakens economic activity and slows down the growth of companies (if they grow), as well as slows them down. Profit.
Unemployment in the United States doubled in the US and Europe in the 1970s, when inflation reached 14%, the sharpest inflation in four decades, compared to the recession in the US in the 1970s. This situation is like the seventies in three main aspects: first, the continuous disruptions on the supply side, which clearly trigger inflation. This deficiency has been cited in many forms, including epidemics and how it has affected global distribution chains, the closest example being the absence of electronic chips. The Russian-Ukrainian war disrupted energy supplies. The oil embargo of many Arab countries at the time caused many to relate to the lack of oil supplies. . The second reason for the analogy with the 1970s was the post-epidemic monetary policy that allowed advanced economies to recover, so many countries facilitated debt by lowering interest rates to revive the economy after the epidemic, and this contributed to rising inflation. The third is the weakness of some emerging markets, which have been hit hard by the tightening of monetary policy and the rise in interest rates.
The reason for the optimism is that central banks have benefited from the lessons of the seventies because they now have a clear target for inflation unlike the seventies, and are pursuing these goals through their monetary policies. In addition, governments are increasingly contributing to the reduction of unemployment rates by creating investment to provide jobs. In the 1970s, many countries entered the cycle and for many years, governments were ready to fight to the point where they could not even get out of some.
Reducing inflationary pressures can be based on two main solutions: first, resolving supply chain barriers, which reduce the cost of goods, food and fuel, and make them more affordable. The solution to these obstacles has not yet appeared on the horizon. China is still plagued by the outbreak of the corona virus, and the shortage of manpower continues to challenge ports and warehouses. Therefore, the central banks sought another solution of raising interest rates to reduce demand from companies and consumers. So far, the Federal Reserve has raised the target interest rate twice, and a few days ago announced that it would raise it for the third time, and is unlikely to double it by the end of this year. While this is a proven solution to control the price of inflation, raising interest rates in this way will remove growth and lead to stagnation, which will be difficult for some governments to resolve.

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