Are We Moving Into a Period of High Inflation?

The rate of inflation has recently risen here in Australia and, depending on how the current world events unfold, may rise even higher during the next twelve months.

The consumer price index figure (CPI) has risen by 2.1% in the March 2022 quarter and for the twelve months ending March 2022, it rose 5.1%. With the war in Ukraine and the increasing issues with global supply chains, the CPI is likely to rise even further during the current quarter.

Unsurprisingly, the rate of inflation has also risen quite substantially in the United States. At the moment, their inflation rate is much higher than ours here in Australia. The US rate of inflation is important to the world because their economy is still the world’s largest. This is an issue because a high inflation rate affects the price of US goods for export and what US consumers are willing to pay for imported goods.

Since the Global Financial Crisis more than ten years ago, central banks throughout the world have purposely kept interest rate low in order to keep their economies moving. Amongst other things, this has resulted in a large build-up of cash in the economy. People have been reluctant to spend their extra cash and as a result inflation has remained low due to the lack of demand for goods and services. Much of this extra cash has instead been invested into assets such as property, shares and cryptocurrencies.

With the debilitating Covid restrictions having now been lifted worldwide, people are starting to come out of hiding and begin spending their extra cash. However, shortages in the global supply of goods, caused by, among other things, the war in Ukraine, has put further pressure on the price of available consumer goods.

Not only will the rate of inflation increase but bank interest rates will also rise in order to counteract this rising rate of inflation. There are two traditional methods of keeping inflation rates under control. The first is that the Government increases its budget surplus by taking in more money via taxes which in turn reduces the populations spending money and therefore the demand for consumer goods. The second is by raising interest rates which increases borrowing costs resulting in consumers being reluctant to borrow money in general. Either way the outcome is that there is less money available for consumers to buy the goods and services they want.

With all governments currently reluctant to produce a budget surplus, it means that there will be higher interest rates in the short to medium term. Since interest rates cannot, for social reasons be increased too quickly, high inflation will continue until higher interest rates eventually force inflation down.

Another negative result of high inflation and increasing interest rates, is that the value of assets such as property, shares and cryptocurrencies are likely to fall. This is not only because it costs more to borrow money in order to buy these assets but if you have money to invest, the higher interest rates being offered by lenders will seem more attractive to investors