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Increased demand following the Covid-19 shutdown, shortages of necessary products, rising household deposits, geopolitical uncertainty, and a significant spike in commodity prices are all reasons for rising inflation. The continuance of high inflation might have a wide-ranging impact on the economy, enterprises, markets, and society as a whole. In mature countries, a continuous rise in inflation might prompt a reconsideration of monetary policy, with an unanticipated withdrawal of monetary adjustments. In this instance, we would be causing global financial market volatility, which would result in capital outflows and currency depreciation in emerging economies.
High inflation will harm people whose income is based on wage labour, particularly those with lower earnings. Rising inflation, on the other hand, may help asset owners and borrowers, such as governments that may issue low-interest bonds, while harming lenders who are bondholders.
It may also harm depositors who serve as lenders through the banking system, banks that lend money to debtors, and people who do not own assets like as real estate. Owners of real estate, on the other hand, may gain from a spike in inflationary prices.
According to IMF predictions, the developed countries will witness a high in headline inflation in the latter months of 2021, which will de-escalate in the new year and achieve the objective of about 2% in the middle of 2022. Following a peak in late 2021, inflation in developing nations is likely to decrease to approximately 4% in 2022.
These projections, however, are fraught with uncertainty. A sharp rise in house prices, or a prolonged shortage of essential products in both advanced and developing economies, or continued increases in commodity and food prices, geopolitical instability, and currency depreciation in developing countries, could all contribute to inflation remaining high for an extended period of time.
In such a case, continuous inflation might generate ongoing “inflation worries,” leading to feedback on increased inflation expectations. Preventing this feedback cycle will most certainly be one of the most difficult issues for economic policymakers in 2022. Policymakers will need to improve their credibility in this regard. They will need to highlight the necessity of strong medium-term budgetary frameworks rather than longer-term expenditure promises that may be connected with disappointed expectations in order to gain trust.
In 2022, policymakers will need to be continually attentive. So that they are ready to act quickly and appropriately if any or all of the highlighted threats, such as protracted supply interruptions, increased demand, geopolitical instability, rising commodity and housing prices, materialise. Under these conditions, a poor macroeconomic policy decision might convey the wrong message to firms, economies, and markets, resulting in a feedback loop on inflation expectations with unforeseeable implications.