Inflation tends to remain high when specific factors align in the economic landscape. Those factors include an overabundance of money supply, meaning where central banks flood the market with more currency than it is necessary. When demand for goods and services go beyond the available supply, the prices will go up.
Moreover, if the costs of production, such as wages or raw materials, surge significantly, businesses could transfer the burden to consumers, which will result in high inflation. Additionally, inflationary expectations, coupled with unexpected shocks such as disruptions in vital commodities or fluctuations in exchange rates, can contribute to a further fueling of inflation.
Will the Federal Reserve overcome inflation?
Reuters tells us some interesting things that are happening in the US regarding inflation. The Federal Reserve is approaching the desired level of interest rates to combat inflation, according to two central bankers. However, uncertainty remains when it comes to whether the Fed will pause interest rate hikes, despite the expectations from the market.
Another central banker expressed the scenario of further tightening measures if inflation doesn’t go down significantly. Over the past 14 months, the Fed has increased the benchmark interest rate by five percentage points, which means the fastest rate in four decades. The inflation has slightly eased from 7% to 4.2% based on the Fed’s preferred measure.
Philip Jefferson, the Fed Governor, stated at a conference at the Hoover Institution, as Reuters quotes:
Is inflation still too high? Yes,
Has the current disinflation been uneven and slower than any of us would like? Yes. But my reading of this evidence is that we are ‘doing what is necessary or expected’ of us.
It’s important to keep in mind that the triggers for high inflation can differ between countries and periods.