Inflation pressures appear to be softening up, which is good news for everybody.
Global oil prices, the main culprit behind soaring inflation, along with COVID-19 and Russia’s invasion of Ukraine, are starting to drop from their peak level of $120 a barrel in June this year. They are now just under $90 a barrel.
Surging oil prices have resulted in skyrocketing inflation in both developed and developing nations. The inflation rate in the United Kingdom rose to a new 40-year high of 10.1 percent in July, while that of the United States eased to 8.5 percent in the same month from 9.1 percent in June.
But surging inflation tends to dampen economic growth. Consumers will balk at spending because of high prices.
They will reduce their expenses, purchase only the more essential items and try to save some of their precious money in the bank.
In some cases, consumers will postpone investments, like purchasing properties and automobiles.
The reduced spending from consumers, in turn, will prompt factories to cut back on their production, lay off some of their personnel and defer expansion plans.
The higher unemployment resulting from lower manufacturing output further decreases consumption or demand in the economy. These factors slow down overall economic activities.
China, the world’s second-biggest economy, is already experiencing a slower recovery due to higher inflation and its strict adherence to a zero-COVID-19 policy.
With high inflation rates in China, the US, UK and the rest of Europe, the world economy is facing the risk of stagflation.
Stagflation, or recession-inflation, is a situation in which prices are increasing, the economic growth is slowing and the unemployment rate is steadily high.
Lower economic activities translate into reduced demand for commodities like oil. Crude prices are tumbling from their peaks because there are less engines to fire up, so to speak.
Indications that Iran may soon resume crude exports and Libya is boosting production are adding to downward pressures on oil prices.
Sooner or later, the pressures on the inflation rate will decelerate as oil prices stabilize.
And the economic growth cycle will resume.