as the world recovers from covid19
it's now economies that are running
hotter than predicted the economy is
experiencing a very strong recovery we
brought this economy back from the brink
but with growth has come a surprising
change
inflation soared to its highest level in
over a decade in april the biggest month
over month increase in september get
this
2008. the sharp increase in inflation
blindsided many economists almost no one
saw it coming inflation is the least
predictable it's been for a long time
probably for decades
but is this high inflation just a
temporary blip or could it spiral out of
control
it's the most important question for the
global economy at the moment
[Music]
inflation is when prices rise over time
that'll be a dollar sixty-five please
not that much it's when items and
services from bananas and belts to
housing and heating cost more than they
used to
meaning you get less bang for your buck
keeping inflation steady is a balancing
act
most rich world central banks aim for
prices to increase by around two percent
a year at that level consumers don't
notice changes in prices too much but
when it becomes higher it can be
problematic
you could have a little over two percent
a lot of the time and not worry too much
or you can have a lot over two percent
for a short period of time and not worry
too much but what you don't want is a
lot over your target a lot of the time
because that's really going to start
causing you economic problems for years
the question policymakers had been
asking is why is inflation so low
economies were quite strong unemployment
was very low and people were puzzling
about why prices hadn't taken off as
much as people expected that they would
in those conditions
the pandemic certainly in 2021 seems to
have turned that on its head somewhat
and we've had quite high inflation
especially in the u.s and that's led
people to ask is the era of low
inflation now over
in america inflation hit 5.4 percent in
july 2021.
in the euro area inflation went up to 3
in august
in brazil it has reached over nine
percent
central bankers claim that high
inflation will fizzle out so there's no
need to worry
there will be
inflation but that the process of
inflation
uh will stop
our confidence in that judgment is
somewhat undermined by the fact that
central banks didn't see this burst of
inflation coming so that's just revealed
that forecasts aren't always right
the worst case scenario could be runaway
inflation like that scene in america in
the period known as the great inflation
rates spiked to over 14 percent by 1980.
tell me did you uh buy any meat among
your shopping no i didn't too expensive
the root cause of this was the federal
reserve's loose monetary policy and
rising oil prices
but what's causing inflation to rise
this time around
the first clue is in the way inflation
is calculated
some think that in real terms inflation
hasn't actually risen that much
it just looks higher due to the sharp
dip in prices in 2020
example the cost of crude oil in
september this year was 71 dollars a
barrel
compared to september 2020 when prices
were recovering from a collapse the
price has risen by 74
but if you compare it to september 2019
it's only a 13 increase
this is known as a base effect
and could explain why the european
central bank thinks the peak in
inflation won't last
inflation numbers in 21 which we will
see
rising
are of a temporary nature but there are
other important factors causing current
inflation
supply chains for example have been
hugely disrupted by the pandemic
and just when it has become difficult to
transport goods demand has shot up
making things more expensive
increased demand is thanks in part to
big government stimulus policies america
for example poured 1.9 trillion dollars
into a covered relief package
almost a fifth of us dollars in
circulation by the end of 2020 were
created that year
people in america have been really keen
to spend their stimulus money that
they've got during the pandemic on new
cars unfortunately early in the pandemic
car makers cut their investment in
future production combined with that
we've had this global shortage of chips
so there's been not enough supply
relative to the amount of new cars that
people want to buy as a result you've
had the spillover in demand into the
second hand car market people are buying
used cars instead
used car prices have been a major driver
of recent inflation in the past year
prices have risen by over 45 percent
although recent months have seen a
decline
it's not just the rich world suffering
with inflation
emerging markets have been hit hard too
they are also experiencing pandemic
related supply chain issues
and extreme weather has led to crop
shortages making food more expensive
in brazil the cost of black-eyed beans
has risen by 40
in the past year
soybean oil by 68
and cabbage 76
tens of millions of brazilians can't
afford to put staple foods on the table
food and fuel is a big part of the
expenditure of people in the poor world
so when these prices go up a lot they
reduce people's living standards
and this tends to be more true the poor
you are
it is possible to slow inflation the
power to do so is in the hands of
central banks
they can do this by raising interest
rates what happens when you raise
interest rates generally is that
people become keener to save and less
willing to
invest and slowing the economy slows the
rise in prices
in rich countries central bankers
haven't felt the need to do this yet
at the moment we're not seeing evidence
that would alarms us but we'll watch it
very carefully
but for central banks in emerging
markets sitting tight isn't always the
best option
their institutions are somewhat less
credible than
the institutions of the rich world so
central banks have to be more on their
toes and have to clamp down on inflation
more whenever it rears its head
brazil's central bank has raised its
interest rate five times this year it
was two percent in march in september it
was 6.25
central banks in russia mexico and peru
have followed suit all announcing
increases
and others are expected to tighten rates
in coming months
they're trying to ensure that not only
their inflation comes down a bit but
they also want to signal to the public
and investors that they don't want
inflation to be so high and that they're
credibly fighting it
people's expectations are the final
factor to this story
inflation depends on whether people
think inflation will get out of hand
inflation expectations are
self-fulfilling so if people don't think
inflation is going to happen
then it won't
for the most part
managing people's expectations is
difficult
especially in such uncertain times
but as long as central banks are worried
you may not need to be
what's been unsettling in the pandemic
is that central banks have been a little
bit caught out but in general so long as
central banks maintain their
independence and their focus we should
be all right
thanks for watching to read the
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