The Ripple Effect of US Inflation Spike

The US Inflation accelerated to a four-decade high of 8.5% in March 2022, recorded as its fastest annual pace since 1981. The American Labor Department claimed this leap as the sharpest Year-over-Year increase within the last 40 years and the sharpest Month-on-Month increase by 1.2% from February earlier this year. Being the main driver of the rise, skyrocketing oil and gas prices by up to 25% caused an escalation in fuel costs of transportation for goods and services shipment - resulting in higher prices for consumer necessities. This surging cost for transportation and other pre-existing factors such as high fertilizer cost, crop insurance, and chemicals also led to food prices climbing exponentially across the country. Prices for groceries and shelter also went up by roughly 10%, which puts further pressure on the bottom line of average Americans. Nonetheless, the Consumer Price Index (CPI) was slowing to 6.5%, shown by the deceleration of used cars and apparel prices. In contrast, furniture prices surge, making the signal even more inconsistent as there has already been a wide disparity between the two elements. These broad price swellings are precipitated due to robust consumer demands, congested supply chain, and market disruptions exacerbated by Russia's invasion against Ukraine. Lael Brainard, an American economist currently serving on the Federal Reserve Board of Governors, believes that the current global tension is undoubtedly the biggest drive for high prices of energy - which ultimately leads to high-level inflation.

As a response, the Federal Reserve is presumed to minimize its economical support methodically. According to minutes released on Wednesday (4/6), the Federal Open Market Committee agreed during its March meeting that the central bank's US$9 trillion balance sheet needed to be reduced. The Fed's balance sheet would be reduced by more than US$1.1 trillion per year under an initiative to sell US$95 billion worth of assets per month starting in May 2022. The cut will help avoid a sustained inversion of the Treasury yield curve, in which shorter-term bond yields, such as two and five year bonds, climb above longer-term bond yields, such as 10 and 30 year bonds, as they did in the first few days of April 2022. The Fed's balance sheet moves could also reduce its appetite for some future rate hikes. They also predicted a drop in consumption as a result of the government's push for higher interest rates and a minimisation in its support. The central bank expected consumer demands would be restricted without job market deceleration. Furthermore, Andrew Hunter, senior US economist at Capital Economics, stated that Fed officials will still increase the interest rate up to 50 basis points in the next month. US President, Joe Biden, conveyed his strategy to deal with high gas prices during his speech at Des Moines, Iowa. He promoted the use of ethanol as the substitution of US fuel during the summer in an attempt to tackle gas prices. In essence, the United States government, in the case of countering the inflation, took several strategies. The Fed officials focused more on stabilization of market prices by reducing demands, Meanwhile, the President paid attention more on gas price stabilization.

With regards to the anticipation of a rise in inflation and bold actions coming from central banks across Asia, markets are taking measures in price as it aligns with trends currently happening in the US. The soar in consumer prices rose leading to charges of pressure on the Federal Reserve. Due to the COVID-19 pandemic, transactions are declining, and productions in China are being disrupted. Over and above, the invasion of Russia in Ukraine compounds this phenomenon by resulting in gray areas in the supply chain and commodity prices. The war has also resulted in disarray in commodities markets, in which energy and fuel prices increased, scarcity in grain supplies, and rising fertilizer and transport costs. As the tension between Russia and Ukraine remains hostile, the CPI in various parts of the world has grown, including Indonesia. Following this, Bank Indonesia makes efforts by taking monetary policies to keep economic growth steady and try to stabilize prices. Geared toward this, Bank Indonesia plans to raise interest rates and government bonds and slow down inflation. In addition, Bank Indonesia is also reducing liquidity to prevent further inflation from happening. Despite the various preventive measures reinstated by governments, it is still unclear whether an upcoming economic catastrophe such as a recession could be prevented or merely postponed. Being one of the biggest economies of the world, the US inflation impacts the world at a massive scale leading to further uncertainty and making the population perturbe about what’s to come.

Sources:

Kompas

New York Times

The Guardian

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