How are world powers dealing with inflation?

Highlights

• Due to demand-supply imbalances, high inflation has taken a strong stance in the world economy.
• Amid all the market fluctuations, countries are finding personalised ways to deal with the economic crisis.
• However, it is difficult to predict how the market will be performing in the coming weeks as there are two extremities: the arrival of Christmas and Omicron.

As the world economy has entered the recovery phase, the market factors are dwindling rapidly. Due to demand-supply imbalances, high inflation has taken a strong stance in the world economy. Additionally, interest rates and cost of living are mounting high. Amid all the market fluctuations, countries are finding personalised ways to deal with the economic crisis.

However, it is difficult to predict how the market will be performing in the coming weeks as there are two extremities: the arrival of Christmas and Omicron. The Christmas period is expected to induce more consumer spending and thus good performance in the market. However, the “most-dangerous” variant of the coronavirus has erupted. And it is yet to be seen if the market would keep performing well or fall in the same pit of recession once again.

Nonetheless, until the effect of Omicron isn’t clear, let’s focus on the stance taken by respective central banks to tackle inflation and related factors.

The US

In the US, the job market is undoubtedly running at an all-time high. Additionally, stimulated consumer spending due to Christmas are injecting good money into the market. However, the level of inflation is raging high due to high oil prices, supply chain imbalances, etc. As a result, the inflation rate in the US is running at 6.2%, which is the highest in the last 30 years.

So, to deal with high inflation and subsequent imbalances, the federal government has raised interest rates. However, increasing the interest rate might not be a permanent solution as it can be counterproductive and send confusing signals in the recovery period.

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The UK

The UK is one of the countries that are highly dependent on world trade; thus, it has been severely affected by the rise in oil and gas prices globally. In October, inflation reached 4.2% and is expected to go higher by February. As a result, the inflation rate in the UK is the highest of the decade.

Thus, to combat the market variations and instabilities, the UK  is planning to increase interest rates. However, policymakers worry that high-interest rates would imply higher living costs, and people would demand higher wages and so on. So, the UK can slip into the loop.

The EU

The EU has taken a different stance than the US and the UK. The EU is running at an inflation rate of 4.1%, which is a thirteen-year high. However, The EU is not planning to raise interest rates yet, and the Union controls the interest rates of 19 member nations.

The officials believe that the purchasing power had been low throughout the pandemic, and it’s still squeezed due to high oil and gas prices. Thus, rising interest rates and thus the cost of living will place a hurdle in the economic recovery.

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How are the World Powers Dealing with Inflation?

Bottom line

Australia is staying patient in terms of raising interest rates. Australia is relying on “Australian exceptionalism”. However, Japan is an exception to the inflation surge, and recently the country announced a spending stimulus package to its citizens. Additionally, it is doubtful the interest rates would go up for China, considering the property sector’s fragility.

Conclusively, it is interesting to note how different countries deal with market fluctuations in unique ways. Central banks of respective countries were making policies unknowing the adverse effects that the new Omicron virus can cause. It is yet to be seen how to virus plays out with market variables.