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Business English News 49 – Inflation & Interest RatesGovernment spending throughout 2021 was a boon to the business sector. Jobs
returned, production rose, and many countries ended the year on a positive note.
But growth – and years of low interest rates - has raised the specter of
inflation, or rising prices. Now all eyes are on central banks, especially in the
United Stated, to see how they’ll respond. As the NY Times reports:
Federal Reserve policymakers have moved into inflation-fighting mode saying
they would cut back more quickly on their pandemic-era stimulus at a moment
of rising prices and strong economic growth. This move will cap a challenging
year with a policy shift that could usher in higher interest rates in 2022.
Of course, nobody complained about increased consumer confidence in the
second half of last year. However, robust economic activity and the steady flow
of dollars are fueling the demand-pull factors that lead to price increases. And
these pull factors are being compounded by push factors, as CNN explains:
Several factors are keeping prices elevated. One is the supply chain chaos that
came to a head last summer. Even though some bottlenecks have eased, the
issues are not fully resolved. And higher transport costs will likely be passed on
to consumers. Another big contributor is the high cost of commodity prices,
leading to surging energy and food costs. Prices in both sectors have soared this
year and added a good chunk to the inflation we have already seen.
Just how high is inflation? At the start of the year, the rate in the U.S. was getting
uncomfortably close to 7%. And many anticipate that it will continue to rise. In
some countries, like Turkey, economists predict rates of up to 40% at some point
in the year. This is well beyond what is generally regarded as an acceptable rate
of inflation of 2%. But governments and economists aren’t unanimous about the
best approach to the issue, as reported in The Conversation:
This has been causing a lot of debate among central bankers about the best
course of action. Some say this burst of inflation is transitory and will pass
without the need for any intervention. Others worry that it is the start of a longer
period of runaway prices. They argue that we should be raising interest rates and
cutting back on “money printing” – also referred to as quantitative easing or
QE, which most major economies have been doing in recent years.
Ó 2022 Business English Pod Ltd. All rights reserved www.businessenglishpod.com 1
, The relationship between easy money and inflation may seem simple at first
pass: when interest rates are low, people borrow more and spend more. When
interest rates increase, people tend to save, which cools the economy and reduces
inflation. It’s not always that simple, however. And according to Market Watch, rate
hikes in this particular situation could be misguided:
It may be heresy to those who think the Fed is all-powerful, but the honest
answer is that raising interest rates wouldn’t put out the fire. Short of throwing
millions of people out of work in a recession, higher rates wouldn’t bring supply
and demand back into balance, a necessary condition for price stability. The Fed
have misdiagnosed the problem and are demanding the wrong kind of
medicine. The problem isn’t too much demand; it’s too little supply.
Like it or not, there’s general agreement that banks are going to use the tools
they’ve got in an effort to combat rising prices. There’s talk of a March
announcement, and in all likelihood we’ll see two or three more hikes throughout
the year. But don’t expect a quick end to the issue. As the Star reports:
Price increases will continue in 2022, driven by real estate, food, and passenger
vehicles. However, while prices are set to continue climbing, so are wages. The
upswing in inflation has not been matched by wage growth so far, but with the
current hot labor market, workers have bargaining power and may see their
wages rise in 2022 as a result.
The possibility of higher wages should be good news for consumers facing rising
credit card rates and mortgage costs. Still, a lot of uncertainty and volatility
remain. And governments are determined to do whatever they can to bring greater
stability to the system. On the whole, there’s cautious optimism about the state
of the economy through 2022, as CNN explains:
Given the strength of the recovery, the economy should be able to absorb rate
hikes without negative repercussions. Investors tend to agree, with markets
signaling confidence that the Fed will deftly exit emergency mode without
harmful side effects. But there is a chance the Fed overdoes it by raising rates
faster than the economy, or financial markets, can stomach. And that could
severely slow down or even end the recovery.
Ó 2022 Business English Pod Ltd. All rights reserved www.businessenglishpod.com 2
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