Since past few quarters, we have been witnessing that the US inflation is shooting up and the Federal Reserve is under lot of pressure to curtail it by hiking rates and so on. US inflation was languishing below the targeted 2% mark till March 2021 and Fed was seen trying its best to persuade domestic spending to jack up the inflation to the targeted levels.
Fast forward 18 months and the inflation number has become the biggest headache to the Federal Reserve as well as US Government officials. But then, what caused the sudden surge in the US inflation number? Was it a sudden surge or a gradual increase which the Fed and the US Government chose to ignore? Let us dig a bit and try to understand the entire saga of US inflation.
The current situation of the high inflation can be majorly attributed to the economic disruption caused by the covid-19 pandemic and subsequently to the supply chain deficiencies created by the various geo-political tensions.
Let’s try to dissect it further. At the beginning of the pandemic led lockdowns, people started to save more and spend less. Manufacturers had cut short their production because of labor shortage and delay in shipping, etc. When the restrictions were eased, people started to spend more and the companies were unable to cope-up with the surge in the demand which forced the prices to go up.
During the period, US Government was seen infusing loads of money (approximately USD 5 trillion) into the market through various aids and programs to prevent the economy from slipping into a recession. Federal Reserve too was playing its part in supporting the economy by aggressively slashing the interest rates. These measures kept the liquidity high in the US economy.
When the restrictions were eased, corporations and the shipping ports alike were not able to manage the surge in the demand, and as a result the supply chain was started to choke up.
Further, when Russia marched into Ukraine, the energy prices shot up and the global supply chain got choked further which in-turn fueled the hike in food prices. Most of the western counties imposed sanctions and stopped buying oil from Russia. To add to the woes, we saw a lot of layoffs during the pandemic and workers leaving the job in the low-wage sectors. But, once the restrictions were lifted, the labor market started to grow in an enormous pace and the wages now are higher than the pre-pandemic levels as corporations are forced to pay more to bring back workers to their manufacturing setups.
While all these things were taking place and the inflation number was on the rise, Federal Reserve officials chose to ignore the paradigm shift and termed it as “transitory”. By the time they came to realise the effect, most of the damage was done by the rising inflation. Now, the Fed is forced to fight it out in a hard way by rising interest rates and creating a risk of recession.
On 21st September. The Federal Open Market Committee (FOMC) raised the federal funds target rate by 75 basis points to a range of 3% to 3.25% which was the fifth rate hike during this year. Fed Chair Jerome Powell also stated that they will continue their hawkish stance till they achieve the targeted level of inflation to bring in price stability to achieve sustained period of strong labor market condition which could benefit everyone.
Today, the entire global economy is inter-connected and everybody is facing he heat of rising inflations and supply chain disruptions. While the global market conditions and economies are getting more volatile, corporations can choose to digitize the treasury operations to weather the current storm and be future ready. In such a case, the state-of-the-art Treasury, Risk & Trade Finance Management System by IBSFINtech will empower corporations to manage currency exposure, commodity exposure, Money Market and Investments, Operations, Liquidity & Hedge Accounting which is powered by Refinitiv Data & Analytics.
– Authored by Sanket Katti
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