Table of Contents
The Impending High Inflation and its Impact on the World Economy
Significance
The world economy is predicted to face a significant challenge in the form of high inflation next year. A Reuters poll conducted among over 200 economists suggests that there is a growing concern that inflation may turn out to be even higher than forecasted. This poses a risk to the global economy and implies that interest rates are likely to remain higher for longer. The survey results indicate a shift in expectations, as several central banks were initially anticipated to start cutting interest rates by mid-2024, but economists now believe that the more likely timeframe is in the second half of next year. This change reflects the evolving economic landscape and the difficulties central banks face in stabilizing inflation.
Features
At the beginning of this year, investment banks predicted that the U.S. Federal Reserve, serving as a benchmark for many other central banks, would be cutting rates around now. However, despite the success in reducing inflation from its peak, prices continue to rise at a pace that most central banks find challenging to manage. The recent Reuters poll reveals downgrades in economic growth forecasts for 2024 and upgrades in inflation forecasts across 48 economies worldwide. Furthermore, 75% of economists surveyed expressed concerns that these upwardly revised inflation forecasts might be even higher than anticipated.
Objectives
The primary objective for central banks is to achieve price stability and moderation in inflation rates. However, high inflation poses hurdles to reaching these targets. Central banks strive to strike a balance between stimulating economic growth and preventing runaway inflation. Amidst changing economic conditions, central banks must reassess their strategies to ensure that they adopt appropriate monetary policies. The objective is to stabilize inflation rates while fostering sustainable economic growth.
Effects
High inflation can have a wide range of effects on the world economy. Rising prices erode the purchasing power of individuals, reducing their overall standard of living. Businesses also face challenges as higher input costs potentially lead to reduced profitability and job cuts. Additionally, high inflation often necessitates tighter monetary policy, such as higher interest rates, which can dampen borrowing and investment. This may result in slower economic growth, hampering job creation and exacerbating income inequality. Furthermore, a prolonged period of high inflation may erode confidence in fiat currencies and adversely impact international trade.
Pros and Cons
Pros:
– Higher interest rates, if implemented effectively, can help rein in inflation and maintain price stability.
– Strict monetary policy measures can encourage individuals and businesses to save and invest instead of relying on borrowed money.
– A controlled inflation rate can positively impact creditors, as the real value of their loans increases.
Cons:
– Higher interest rates can hinder borrowing, causing a slowdown in economic growth.
– Inflation can lead to increased costs for businesses, reducing their competitiveness and profitability.
– Individuals may experience decreased purchasing power, affecting their overall quality of life.
Fun Fact
Did you know that hyperinflation, a severe form of inflation, has historically led to instability and economic turmoil? An extreme example is the hyperinflation experienced in the Weimar Republic in Germany during the early 1920s, when prices rose at an astronomical rate, rendering the German mark virtually worthless.
Mutiple Choice Questions
1. What is the main risk associated with high inflation next year, according to economists?
a) Interest rates will remain higher for longer
b) Central banks will start cutting interest rates sooner than expected
c) Prices will continue to rise faster than preferred by central banks
d) Inflation will turn out lower than forecasted
Explanation: According to the information given, the main risk associated with high inflation next year is that interest rates will remain higher for longer. This is supported by the statement that three-quarters of over 200 economists polled by Reuters believe that the main risk is that inflation turns out higher than they forecast, suggesting that interest rates will also remain higher for longer.
2. When are several central banks expected to begin cutting interest rates?
a) By the middle of 2023
b) By the middle of 2024
c) In the first half of next year
d) In the second half of next year
Explanation: The information provided states that several central banks are still expected to begin cutting interest rates, but a growing number of economists surveyed are adjusting their views and pushing the more likely date into the second half of next year.
3. How do economists’ expectations regarding interest rate cuts this year compare to the start of the year?
a) Investment banks were predicting rate cuts at the start of the year
b) Expectations for rate cuts have remained unchanged
c) Expectations for rate cuts have shifted to later in the year
d) Economists were not predicting rate cuts at the start of the year
Explanation: The information states that at the start of this year, some investment banks were predicting the U.S. Federal Reserve, which sets the tone for many others, would be cutting rates right around now. This indicates that economists’ expectations for rate cuts have shifted to later in the year.
4. What is the current trend in inflation rates?
a) Inflation rates are significantly declining
b) Inflation rates are rising faster than preferred by central banks
c) Inflation rates are stable and on target
d) Inflation rates are expected to increase next year
Explanation: According to the information given, despite success in bringing inflation down from its highs, prices are still rising faster than most central banks would prefer. This indicates that inflation rates are rising faster than preferred by central banks.
5. What were the results of the Reuters poll regarding inflation forecasts?
a) Majority of the 48 surveyed economies had inflation downgrades
b) Majority of the 48 surveyed economies had inflation upgrades
c) Inflation forecasts for all surveyed economies remained unchanged
d) The poll did not cover inflation forecasts
Explanation: The information states that the Reuters poll of over 500 economists produced inflation upgrades for a majority of the 48 economies surveyed. This implies that a majority of the surveyed economies had inflation upgrades.
6. How do economists view the risk to upgraded inflation forecasts?
a) Majority of economists believe the risk is higher than forecasted
b) Majority of economists believe the risk is lower than forecasted
c) There is equal belief among economists that the risk is higher or lower than forecasted
d) The risk was not addressed in the information provided
Explanation: The information states that a 75% majority of economists surveyed believe that the risk to the broadly-upgraded inflation forecasts is skewed higher. This indicates that the majority of economists believe the risk is higher than forecasted.
7. What was the unexpected growth rate of the U.S. economy in the third quarter?
a) 5%
b) 2.6%
c) 2.9%
d) 4.5%
Explanation: The information states that the U.S. economy unexpectedly grew nearly 5%, annualised, in the third quarter. Therefore, the correct answer is 5%.
8. What did European Central Bank President Christine Lagarde say regarding interest rate cuts?
a) It is premature to discuss interest rate cuts
b) Interest rate cuts are necessary to stimulate the economy
c) Interest rate cuts will be implemented in the second half of next year
d) Interest rate cuts are more likely to happen in the first half of next year
Explanation: The information states that Christine Lagarde said after the ECB snapped a 10-meeting tightening streak that “even having a discussion on a cut is totally, totally premature.” This indicates that Lagarde believes it is premature to discuss interest rate cuts.
9. Which central bank is still expected to maintain ultra-loose policy through next year?
a) Reserve Bank of Australia
b) Bank of Japan
c) Federal Reserve
d) European Central Bank
Explanation: The information states that even the Bank of Japan, which has been the outlier sticking to ultra-loose policy through this entire round of inflation, is now expected to abandon negative interest rates next year. Therefore, the correct answer is the Bank of Japan.
10. What would prompt the first cut by the central bank, according to a majority of economists?
a) To make real interest rates less restrictive as inflation falls
b) To stimulate the economy due to a significant hit to demand and inflation
c) In response to pressure from financial market traders
d) To address the negative effects of high inflation on the global economy
Explanation: The information states that over a two-thirds majority of economists surveyed said the first cut by the central bank they cover would be simply to make real interest rates less restrictive as inflation falls. Therefore, the correct answer is to make real interest rates less restrictive as inflation falls.
Note: The questions and answers have been generated based on the provided information, but may require additional context or clarification for a complete understanding.
Brief Summary | UPSC – IAS
A majority of over 200 economists surveyed by Reuters believe that high inflation will be a persistent issue in the world economy next year, with the main risk being that it turns out higher than anticipated. As a result, interest rates are likely to remain higher for a longer period of time. While some central banks had anticipated cutting interest rates by mid-2024, growing number of economists are pushing back their expectations to the second half of next year. Economists also downgraded growth forecasts for 2024 while upgrading inflation forecasts for a majority of the 48 economies surveyed.