Why is inflation hitting majority of the countries worldwide seemingly at the same time?


Why is inflation hitting majority of the countries worldwide seemingly at the same time?

In: 4

Because corporations are raking in record profits. It’s not inflation due to macroeconomic factors or supply chain issues. It’s literally corporate greed.

Everyone is posting record profits because they’ve realized they can and there’s nothing anyone will do about it

The pandemic played a large role in it.

A lot of companies had to (partially) shut down. People had to work from home. Import/export was often not possible or very expensive due to regulations. There were major shortages of a lot of things. Running companies simply cost most and earned less, so prices went up.

Now, the companies don’t want to lower their prices. But people still need to pay the bills, so the wages are (too) slowly rising to match the prices.

Inflation is a process that never stops. Covid just kinda synced the world.

There are specific reasons for every country and region. But there is also a bit of a reminder and some underlying factors. None of this is truly ELI5, in a sense.

First, the reminder. If you’re under, say 35 years old, what has been “normal” inflation isn’t actually normal. Many of the major economies had low inflation for nearly 15 years and in Japan, that has been the case for nearly 30 years. The central bank target for the developed countries is around 2-2.5%. So many central banks have been running an inflationary/expansionary model for a decade and a half, increasing the money supply.

Second, COVID. Again, major economies ran VERY expansionary policies from 2020/2021. Lots of cheques sent to people and money used to prop up companies that experienced shut down difficulties.

Third, the energy market. Russia is a huge oil exporter. The EU rapidly transitioning away from “low cost” Russian oil/gas and this caused the energy market to go into a bit of turmoil. Economies that import oil suffer because the EU buys a lot more of non-Russian oil driving up energy prices for everyone. All of this makes energy less cheap for Europe too. Energy prices underly almost any manufactured product, not only transportation. Food production in modern times require a lot of fertiliser much of which is made from oil products.

Fourth, conflict. Wars drive up economic uncertainty and also hampers investment (broadly). Companies delay product and investments. New supply chains are costly and typically less efficient until scale and maturity develops. This makes things more expensive.

Fifth, China. Geopolitically, there is also uncertainty how the Chinese economy and politics develop. Being in a highly strained diplomatic situation means companies are moving some production away from China.

There are lots more factors – some more impactful and some less and it depends a lot on which country it is.

In no small part, the pandemic *ending*. Tons of people went back to work, pretty quickly – definitely quicker than global supply chains recovered. Suddenly more people earning money, without the supply to respond, raised prices for just about everything. The war in Ukraine also increased the cost of oil, which is not just your gas station but something that every company in the world buys.

Supply chains have recovered, but companies have a habit of not reducing inflation on their own – if they paid 10% inflated prices for all their supplies last year, they’ll raise their own prices 10% next year. Generally, it takes a temporary *recession* to reduce the inflation rate. At least, according to macroeconomic theory and recent history. Every company *could* all agree to reduce their prices and bring inflation back down, but… who wants to do that? they’re making money.

Because we have a global economy, now, where commodities like grain, oil & natural gas, even microchips, to an extent, are traded around the world, but have limited amounts available at any given time.

Other answers have talked about grain and fuel prices and those reasons, but there’s another I haven’t seen mentioned, yet:

Microchips – while many companies can design chips, the extremely small size of modern chips means that precision equipment is necessary to mass produce them reliably. TSMC in Taiwan has a handful of factories in East Asia that can make these latest chips, and no one else. This has been coming for a few years. The older factories in the US, Europe and Japan cannot mass produce these chips. The continual cycle of upgrades in computers, phones and other electronics, means there is a large and constant demand. As factories shut down for periods or shipping of raw materials was delayed, this caused a production backlog that was months long. Everything needing chips was facing shortages – even car manufacturers were halting production lines because they lacked the chips necessary.

There has been a lot of investment in new factories with the latest equipment and processes, but the truth is it takes YEARS to build the production lines and then you have to tweak things to optimize it for mass production levels with an acceptable failure rate. There’s just no easy fix.

Again – the other answers here give the big picture; this is just one piece of the problem.