Inflation has been in the headlines ever since the rampant spread of Covid. There is no doubt that Covid has caused major havoc as it spread across the world, claiming millions of lives, and leaving some battling long-term health issues. While the Covid waves have seemed to settle down, the ripple effects on the world economy have taken a drastic turn.
Many have lost their source of income, businesses have been shuttered, and the inflation rate has increased. For example, in 2021, the U.S. inflation rate was 4.70%. Inflation is presently at 7.48%. If this rate persists, the dollar will have even less buying power next year. A huge part of the world population is facing financial distress, and the rising inflation rates have not helped.
As a part of inflation, there has been a price surge in the energy market, and petrol prices, on average, rose from $2.19 per gallon in September 2020 to $3.27 a year later. The surge in fuel prices has affected Europe as well, with the average UK energy bill increasing by 54% for the coming year. This has fueled the growth of electric vehicles in European nations. In 2020, the European electric vehicle (EV) market enjoyed extraordinary growth, with passenger electric car sales up 143% from 2019. Due to strong sales in 2020, Europe surpassed China as the world’s largest EV market. This occurred during a period when the automotive market was severely disrupted by Covid. Although total new car sales in Europe declined by 20%, the spike in EV sales increased the EV percentage to 11%. This can be viewed as a positive thing in the chaos. Using renewable energy is beneficial to both the environment and human beings.
While many underdeveloped and developing countries faced dire economic consequences, Covid did not spare developed nations. Twelve-month inflation was above 5% in 15 of the 34 countries designated as Advanced Economies (AEs) by the International Monetary Fund’s World Economic Outlook through December 2021. It has been more than 20 years since there has been such a large, widespread increase in high inflation (by modern standards). A similar wave has impacted emerging markets and developing economies (EMDEs), with 78 out of 109 EMDEs seeing annual inflation rates exceeding 5%. This proportion of EMDEs (71%) is about double what it was at the end of 2020.
The conjected inflation over major world economies doesn’t look promising. Inflation in the United States could reach 3.5% in 2022, the highest among advanced nations. The assets on the U.S. central bank’s balance sheet have doubled in the last two years, and now account for nearly 27% of GDP. Inflation numbers in China tell a different story. Rates are expected to drop to 1.8%, below pre-pandemic norms. In fact, prices in East Asia have generally been unaffected by inflationary pressures, but that could change in 2022. While inflation in Europe is rising, it is at around half the rate of the United States, with inflation rates in Germany, France, and Italy expected to be below 2%. The United Kingdom, on-the-other-hand, is an exception, with inflation expected to hit 2.6%.
Many economies have started taking remedial actions to handle inflation, but there clearly is a long way to go.