Strong demand for goods amid an unprecedented government spending blitz and supply-chain constraints related to the COVID-19 pandemic have elevated inflation over the past year.
Economists are expecting further price increases related to the Ukraine crisis with crude-oil prices recently hitting their highest level since 2008.
In this article
Risk of stagflation
US inflation hits 40-year high
Energy costs surge in Europe
Inflation risks in Australia rise
Food Inflation
Risk of stagflation
With persistent shipping bottlenecks and shortages of supplies like semiconductors rippling across the economy, businesses are charging higher prices for products and services.
A tight labour market is not helping, with more open jobs than there are workers looking for work, leading to cost-push inflation.
Central banks are now faced with the daunting challenge of getting inflation in control at a time when global growth is slowing, stoking fears stagflation could make an unwelcome return.
Stagflation is characterised by slow economic growth and relatively high unemployment, coupled with rising prices.
Inflation is already at its highest level in decades in some advanced economies, and with key food and energy prices surging in the past few weeks, analysts believe the peak could be some months away still.
US inflation hits 40-year high
Inflation in the US grew worse in February with the escalating crisis in Ukraine leading to price pressures becoming more entrenched.
The consumer price index (CPI), which measures a wide-ranging basket of goods and services, accelerated 7.9% over the last year, hitting a fresh 40-year high.
The surge in February was the fastest pace since January 1982, back when the U.S. economy confronted stagflation.
Energy was at the forefront of ballooning prices, rising 3.5% in February and accounting for about one-third of the headline gain.
Food prices also rose 1% compared to the previous month, which is the fastest monthly gain since April 2020.
Shelter costs, which contributes to about one-third of the CPI weighting, rose 4.7% compared to last year, the fastest annual increase since May 1991.
Energy costs surge in Europe
Consumer prices in Europe rose by a record 5.8% in February over a 12-month period, underscoring fears that the war in Ukraine will drive up the cost of living and increasing pressure on the European Central Bank (ECB) to adjust monetary policy.
The jump in the cost of living in the eurozone has put the central bank in a difficult spot as it is well above the ECB’s 2% inflation target.
This has created a conflict between bank officials who are pushing for tighter monetary policy to tackle inflation and those who want a pause to assess the economic impact of Russia’s invasion of Ukraine.
The conflict in Ukraine is pushing fuel prices higher as about 40% of Europe's energy needs are sourced from Russia.
Although European countries are looking at reducing their dependence on Russia, measures to boost renewables, biogas and hydrogen will not yield results immediately.
Inflation risks in Australia rise
In his speech to the Australian Financial Review Business Summit last week, RBA governor Philip Lowe said that inflation in Australia hasn’t and won’t reach the levels seen in the US.
He noted that local energy costs are moving only modestly, and goods prices (excluding energy) are up only 3% in Australia while it has surged 9% in the US.
Lowe also said that Australian wage growth is running at 2.3%, compared with 4.5% in the US.
He noted that while there are some examples of pay rises much greater than 3% in some pockets of the economy, evidence shows wage growth is currently running “at two-point something per cent” with businesses expecting pay rises of between 2 and 3 per cent.
But with the war in Europe and commodity prices soaring, Lowe acknowledged that “risks to inflation have certainly moved to the upside, that’s clear”.
Along with rising oil and commodity prices, Lowe is also concerned about the change in the Australian consumers’ views about inflation.
“There is a risk if these higher inflation rates are sustained as a result of a sequence of negative supply shocks, that wages growth picks up more quickly than forecast as workers seek compensation for the higher inflation,” he added.
Lowe said that the prospect of wages and inflation rising at the same time would make inflation “more persistent and broad-based, and require a larger monetary policy response”.
Food Inflation
Fertilisers prices across the world are rising as supply disruptions from Russia add to concerns that record global food inflation will accelerate.
Russia is a critical low-cost exporter of most major kinds of crop nutrients.
Many countries and companies around the world have stopped importing Russian crop nutrients, stoking fears of shortages.
Potash supply has taken a hit due to the sanctions as Belarus and Russia account for almost 40% of global potash production.
The Ukraine crisis also is pushing up the cost of natural gas, the main input for most nitrogen fertilisers, forcing producers in Europe to cut output.