The Federal Reserve System fights inflation in the United States.
But, one thing the investment community needs to be very aware of is that inflation is not just a US affair.
The Bank of England warns that the UK faces an inflation rate of around 13.00% by the end of 2022.
And, by the third quarter of 2023, the rate will still be in double digits.
Only in 2024 will price increases return to reasonable levels, perhaps even as low as 2.00%.
The British central bank intervened to combat this situation by increasing its key interest rate by 0.5%. The key interest rate now stands at 1.75%.
This is the largest rate increase in 27 years.
The main reason for this price increase is the ongoing war in Ukraine and the impact this conflict has on the price of energy.
This shock also has a major effect on the economy.
The Bank of England now expects personal after-tax income to decline in 2022 and 2023, posting a 5% drop from peak to trough.
Real GDP is expected to decline for five consecutive quarters. That would show a peak-to-trough decline of 2.1%, which the bank says is the worst performance on record since the 1990s.
How does the Bank of England combat both these high inflation rates and the economy’s declining output?
Of course, the Bank of England is not the only central bank in the world to face such problems.
As we know, the Federal Reserve system is facing this two-headed problem, as inflation in June 2022 was around 9.1%, and the economy of the United States, in the second quarter of 2022, experienced its second consecutive quarter of negative growth. in real GDP.
The European Central Bank is also facing such pressures as Germany has an inflation rate of just under 8.0% and France has an inflation rate of around 6.0%. Italy is also experiencing inflation problems.
Even Asia is showing evidence that prices are rising there. These numbers have just started to increase in recent months.
So the current situation appears to be a global affair.
And central banks around the world have responded to the pressures.
Of course, these actions raised concerns that individual countries or even the global economy might enter a state of stagflation, much like what happened in the 1970s.
How did the world end up in such a state?
Well, most central banks around the world have responded to the Covid-19 pandemic by generating lots and lots of liquidity to protect economies from financial or economic collapse. This movement was led by the Federal Reserve System in the United States but was also supported in most countries.
Money was readily available.
Now that money still exists and finds its way into the expense streams. And, of course, those expenses include money for higher prizes.
Energy shortages, even before the Ukraine affair, have driven energy prices up, and supply chain issues have only added to the disruptions that have caused very many price adjustments .
The general picture of the world today is one of general imbalance, but with lots and lots of money and debt floating around.
It’s a world with lots and lots of inflation and increasing efforts by central banks to fight inflation.
Central bankers are under enormous pressure.
It is also a world of radical uncertainty because of all the imbalances that currently exist in the world, but also because of the rapid transformation that is taking place due to the technological changes that are taking place.
Countries cannot hold back the technological changes that are occurring, but they also face enormous challenges in dealing with the resource allocation challenges that come with the ongoing transformation.
In a certain way, we have witnessed a reduction in the global globalization that has been going on for about 60 years, but in another sense, a new globalization is taking place, which we understand very little the current time. . This change is mostly unknowable at present.
The value of the pound
The value of the pound continues to fall.
On Thursday August 4, 2022, it costs around $1.22 to buy one British pound.
On December 30, 2021, it cost $1.35 to buy one British pound.
Thus, the Bank of England raised its key rate this year.
But the Federal Reserve system has surpassed it.
The pound has weakened, although central bank authorities took steps to protect the pound earlier this year.
It looks like the value of the pound will continue to slide for now, especially as Federal Reserve officials seem intent on aggressively raising the Fed’s key interest rate.
Conclusion: what role will global inflation play in the fight against inflation that is taking place in all these major countries of the world?
Moreover, the Russian-Ukrainian conflict is still ongoing.
The Covid-19 pandemic, in its many forms, is still here.
Energy problems remain and will not be resolved in the near future.
Supply chain issues abound.
And, there are political problems everywhere.
Imbalance invades the scene and radical uncertainty darkens the future.
Wow! Double digit inflation in England for next year!
Not a very nice picture.