International Communique No. 336 – 4th of May 2022
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WHAT IS FUELLING RUNAWAY INFLATION IN THE US AND THE EUROZONE?
As we headed into 2021, inflation was clocking only 2% and 1% in the US and the Eurozone, respectively. By March, this had climbed to 8.5% and 7.4% – dizzy heights not seen since the early 1980s.
How did it come to this? First of all, by locking everyone in at home in response to the pandemic, governments triggered a drastic reduction in the supply of goods and services. At the same time, ultra-loose monetary policies in the form of zero interest rates and quantitative easing combined with fiscal assistance (such as the generous cheques sent to American households) stoked demand for these same goods and services. So it’s not surprising to see inflation emerging.
Later on, pressure to transition to clean energy has led to decreased spending on exploring for new fossil fuel deposits, resulting in a slower uptrend in production output. This has also triggered a sharp increase in demand for gas, which is used as a back-up in power generation whenever wind turbines and photovoltaics are not supplying energy. In a nutshell, this resulted in a supply-demand imbalance, which in turn sent hydrocarbon prices sharply higher, particularly as concerns increase in Europe, where more resolute efforts are being made to decarbonise the economy.
Then came the war in Ukraine and the subsequent sanctions against Russia, which have choked the supply of several types of commodity – from energy and softs to metals and ores.
Lastly, China remains hell bent on stamping out the highly contagious omicron variant, which is dampening the production of manufactured goods.
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