Russia invaded Ukraine on 24 February. No one knows when the war will be over. As a result, the prices for almost all the consumer goods including petroleum are surging to record high. All the NATO nations including US have imposed economic sanctions on Russia. All EU countries which have been buying oil from Russia are trying to find alternate supply sources.
Russia is the 3rd biggest oil producer in the world. Ukraine and Russia produce about 80% of Sunflower oil and about 30% of wheat in the world. According to Germany's Federal Office for Economic Affairs and Export Control, Ukraine's wheat production accounts for 11.5% of the world market, while Russia's share is 16.8%. If the Ukraine war is prolonged, Ukrainian farmers will not be able to plough the land to plant wheat. This will aggravate the situation. In fact, the Ukraine war is causing inflation in every country especially USA. Inflation continues to rise in the U.S., now at its highest level in four decades. What’s behind the surge?
The US economy will tip into a recession next year, according to nearly 70 per cent of leading academic economists polled by the Financial Times. The latest survey, conducted in partnership with the Initiative on Global Markets at the University of Chicago’s Booth School of Business, suggests mounting headwinds for the world’s largest economy after one of the most rapid rebounds in history, as the Federal Reserve ramps up efforts to contain the highest inflation in about 40 years. The US central bank has already embarked on what will be one of the fastest tightening cycles in decades. Since March it has raised its benchmark policy rate by 0.75 percentage points from near-zero levels.
What are the biggest contributors to inflation?
Currently, consumer prices rose at their fastest pace in 40 years. Higher consumer prices are a result of persistent supply chain challenges, labour shortages and continued strong demand for goods. Other contributors to the current inflation issue include fewer workers in the labour market, forcing employers to increase wages to attract workers, and Consumers retaining savings from government stimulus programs and depressed purchases of services, which directs spending towards goods that have a limited supply.
To understand inflation better, it might be best to view it through the Consumer Price Index. Food makes up around 15% of the CPI and around 8.5 % of disposable income in the U.S., while the leading drivers of the CPI are housing and transportation because higher energy and labour costs, coupled with supply chains that are still recovering from disruptions in 2021, continue to be driving factors in overall inflation.
What is causing rising food prices?
The current increase in food prices is being driven by some of the same factors that are driving overall inflation but for different reasons. In the last half of 2021, many Americans chose to dine in instead of dining out due to increasing COVID-19 cases, causing a higher demand for food purchased at grocery stores. As a result, grocery and food prices increased by 6.8% in November 2021 from 2020. Consumer packaged goods are also being impacted significantly by higher diesel fuel prices, a shortage of truck drivers, and increased labour costs.
What are the lasting consequences as a result of rising inflation, especially to the average American?
The cost of living in the U.S. increased 7% since January 2021 as a result of higher inflation. This happened in spite of wages increasing by 4.7% in 2021 because the costs of goods and services outpaced these gains reflected in our overall cost of living, thus the average worker received a 2.4% pay cut. The impacts of inflation are felt most by lower-income families, families of colour, and rural households more than other demographics a 2021 Bank of America research report states. Retirees will also feel the impact, while the Social Security cost-of-living adjustment for 2022 is 5.9%, it does not cover full inflation. To combat all of this, the Federal Reserve might be forced to intervene by raising interest rates, which will make it more expensive to finance the new businesses, cars, and homes that are vital to growing our economy.
How long is this expected to continue and how it is resolved?
Economists are predicting this to persist through 2022 before we see some relief in 2023. The impact of higher energy costs may persist well beyond this as government policy shifts the U.S. away from the consumption of fossil fuels, and restrictions on investment and exploration by agencies and activist investors will cause energy costs to continue to rise in 2022. Ultimately, supply chain resiliency will improve but inflation is certainly not transitory and the U.S. will see higher inflation for the next few years.
What are the biggest contributors to inflation? In 2021, consumer prices rose at their fastest pace in 40 years. Higher consumer prices are a result of persistent supply chain challenges, labour shortages and continued strong demand for goods.
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