Many are talking about goods getting more expensive these days. Across several countries, inflation has hit its highest level in decades. Supply shortages and massive monetary stimulus have contributed to increasing consumer prices. Asset prices, including houses, have also risen significantly.
Inflation rates are based on the annual percentage change in average consumer prices. This measures the average level of prices in a country based on a basket of goods and services over a given time period.
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▶️ Venezuela is the highest in the world, with a forecasted 2,000% rise in inflation.
▶️ In the US, energy prices rose over 29% between 2020 and 2021. Meanwhile, food costs have increased 6.5%, driven by labour shortages, domestic demand, rising cost of feed and other inputs.
▶️ Inflation is also rising in Europe, at roughly half the rate of the US, with Germany, France, and Italy projected to see inflation rates below 2%.
▶️ Meanwhile in Japan, businesses are taking a different approach. Instead of input costs passing on to consumers, companies are absorbing the costs to avoid the risk of losing business.
▶️ It’s a different story in China. Rates are forecasted to fall below pre-pandemic levels, reaching 1.8%, but this could change in 2022.
THE FUTURE OF INFLATION WORLDWIDE
A combination of factors unique to COVID-19 have pushed inflation to multi-decade highs. But will it eventually fade over time?
For many countries, the IMF forecasts that it will. By 2025, U.S. inflation is projected to reach 2.5%, while many advanced countries could see rates at or below the 2% target often set by central banks.
Structural forces that began to take hold in the 1980s have led to declining inflation rates for many years. These forces are not likely going away. Globalization is unlikely to stop and slowing energy demand may cause energy prices to level off.
And as vaccination rates increase and more people enter the workforce, spending could move towards services, lessening the price pressures on goods.
As countries brace for higher inflation in the short-term, the long-term view may return to pre-pandemic trends.