Market Overview

1 October 2021

Inflation Became a Serious Throttle for Economic Growth

Global economic growth faced a serious sudden throttle with contradictory consequences, as high energy prices were globally boosting inflation. Logically, low inflation was a serious problem for economic growth in preCOVID-19 years, meaning low consumer and investment demand hampered economic growth.

Unprecedented monetary injections from the world’s major central banks, of which the Federal Reserve was among the first to take action, reversed this trend to a large extent and bailed countries out of economic turmoil. However, inflation seems to be a self-reproduction process that is beyond any control from monetary regulators. Paradoxically, now high inflation has become a throttle rather than a vehicle of economic growth.

An unfavourable rise of commodity prices, mainly energies, along with surging food prices, has played its role too. Severe winter conditions and a stifling summer managed to globally dry out gasoline and crude reserves, while the recovery of energy supplies in regular volumes were inhibited by lockdowns, falling production, disruption of supply chains, etc. Food production was additionally hit by a dry summer and the lack of crops. This created a grim cocktail of unprecedented inflation spikes.

Natural gas is trading on seven-year highs and crude prices are at their highest for the last three years. Business expenses became so large that most of the production is commercially unfeasible, forcing production facilities to shut down. Consumer spending has undermined the demand for durable goods and as a result, the long forgotten slump is seen to be becoming a reality. And, this is not the worst thing, high and rising prices are accompanied by stagnating production.

The situation is really difficult since production could not be facilitated by existing monetary tools of loose monetary policy. On the other hand, tightening of monetary policy would not halt the inflation, as prices rise not due the excessive demand that could be limited by monetary measures, but due to the lack of supply.

 

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Mark Goichmann
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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