In 2020 at the height of the pandemic, inflation was recorded at just 1.23% in the US which skyrocketed to 7% in 2021 as consumers released their pent-up demand and bought new homes, used cars and electronics with their savings from the pandemic.
In 2021, inflation began to pick up in many countries. The US Consumer Price Index (CPI) rose by 7% in 2021, the highest annual increase since 1982. Many economists attributed this increase to “transitory” factors, such as supply chain disruptions and pent-up demand from the pandemic.
However in 2022, when inflation showed no signs of abating, central banks around the world began to argue that inflation was no longer transitory, but was instead becoming “sticky.”
Inflation continues to remain high due to various factors such as:
Russo — Ukrainian war, sanctions on China & Russia and unfavorable climate conditions for agriculture in East Asia.
Inflation has dropped to 6.5% from 7% in 2022 which is considered to be a small change for a massive change in interest rates which went from 0.25% to 4.50% in 2022 alone.
Raising interest rates directly impedes economic growth. This is because higher interest rates increase borrowing costs for businesses, making it more expensive for them to invest and expand. Consequently, the reduced investment and hiring can hamper overall economic growth and productivity.
The decision to raise interest rates carries the risk of triggering a global recession. A recession is often initiated by a sudden decline in economic growth. If the abrupt increase in interest rates causes a contraction in economic activity, it could exacerbate the probability of a global recession taking hold.
It looks like the narrative changed quite clearly and almost every G20 nation was synchronously raising interest rates along with the Federal Reserve. There was a time that the news cycle was flooded with inflation being “transitory” and it seemed logical.
The narrative quickly changed to making inflation “sticky” which is clearly not the case since the inflation seen in 2022 was just a rebound from the pandemic…
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