Clouds of inflation over the world: interest rates may rise sooner than expected

- Massive liquidity in global markets is the main reason behind rising inflation.

The whole world is now facing a new threat - inflation. The United States, the world's largest economy, has hit a 21-year high. Japan, the world's third-largest economy, has the highest inflation rate in four decades. The United Nations says food inflation is at an all-time high in decades.

China, the world's largest factory and the world's second largest economy, is not doing well. In China, the consumer price index stood at 1.6 per cent in October, but inflation in factory materials was at an all-time high of 150 per cent. The producer price index stood at 12.5 per cent in October, the highest in three decades. China's inflation is affecting the world's importers.

With the economy recovering from the Corona crisis, the rise in commodity purchases and the resulting shortage of raw materials have led to rising inflation and this phase is expected to be temporary, according to the Reserve Bank of India, the Federal Reserve of America and the Bank of Japan. Were. Stock markets around the world continued to rise on the assumption that inflation would be temporary so that interest rates would not have to be raised. The dollar was weakening in the currency market and other currencies were strengthening. Now the Federal Reserve is under pressure to raise interest rates. If Biden, who won the election a year ago with a majority, is under pressure to keep inflation in check, his popularity is declining. The dollar is now seen at an 18-month high against the world's leading currency, on the expectation that the Federal Reserve will raise interest rates. On the other hand, the price of crude oil, the world's largest source of energy, is at a seven-year high and is not declining. The port is full of goods so transportation is expensive, containers are not available, coal is not available.

More than one factor is responsible for the current rise in inflation, the most important of which is the massive liquidity inflow into global markets in March 2020. Plenty of money flow makes money cheaper and consumers line up to buy everything. Demand in the market decreases as many customers start buying at the same time or the big manufacturer raises the price to increase its profit. The price of a stock or commodity rises in the financial market and this is called asset price inflation. This is a dangerous situation as the economy seems to be recovering.

At the moment, there are fears in the country and the world that a fragile recovery of the economy could be affected if interest rates rise and liquidity declines. The US Federal Reserve is not in the mood to raise interest rates at the moment, but will have to raise them in 202. At present, it has reduced monthly bond purchases to control liquidity. Even the Reserve Bank of India is not in a position to raise interest rates but is withdrawing huge capital liquidity through very long term reverse repo. Both operations are slow but interest rates are set to rise. Don't be surprised if the process starts earlier than expected due to inflation.