Hardly a day goes by without inflation hogging global news headlines. More and more, we are reading of that dreaded word — stagflation. For some, the current environment harks back to the 1970s, when rapid inflation necessitated high interest rates, resulting in anaemic economic growth and rising unemployment that persisted for many painful years.
It now appears inevitable that inflation will rise higher and persist for far longer than most expected even just a few months back. Prices are rising across the board worldwide, driven by both supply and demand issues.
On the supply side, pandemic disruptions continue to linger, compounded by spillover effects from the Ukrainian war and, increasingly, export bans by countries for critical food supply. Demand, on the other hand, is still relatively robust, especially in the US, spurred by the reopening of economies. As we have articulated previously in this column, US households, on average, are in good financial shape. Household debts remained near the lowest levels in nearly two decades. Consumer spending is buoyed by massive government handout and trillions in excess savings during the pandemic as well as the positive wealth effect from years of rising asset prices, since the global financial crisis. For now, consumers appear comfortable to continue spending, outpacing inflation, and dipping into their savings.
