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Is stagflation at the door?!

Apr 23,2022 - Last updated at Apr 23,2022

Many economists and analysts warn that the world may be on the verge of a "stagflationary" period, i.e. the continuation of high inflation rates, as a result of the rise in energy and food prices, with economic growth declining to almost stagnation. Are these warnings accurate or not, and why is stagflation usually associated with rising energy prices?!

Stagflation happens because of the conflicting nature of the economic goals. When energy prices rise — which is the main component of inflation in the various economies of the world — inflation rates increase, and to confront them, central banks resort to raising interest rates dramatically. This, in turn, eliminates the possibilities of achieving economic growth rates, which leads to a decline in economic growth accompanied by high rates of inflation, and the economy enters what is known as stagflation. Recession means that the economy records a decline in growth rates for two or three consecutive quarters. This is what happened to the global economy in 1973 when oil prices rose, economic growth declined and the world entered a state of stagflation.

In the first quarter of this year, inflation in the United States, the world's largest economy, reached its highest level in 40 years, at 8.5 per cent. As a result, the Fed responded, much belatedly, because to its conviction that inflation was temporary, by raising its benchmark interest rate by 25 basis points, with several more rounds of hikes expected.

The Fed now faces a dilemma, in which it is either raising interest rates too low to reduce inflation, or too high for the economy to achieve positive high growth rates. This applies to a large number of central banks in the developed and developing countries in the world. 

In China, which is the second largest economy in the world, inflation rates did not exceed 1.5 per cent, on an annual basis, in March of this year. On the other hand, the Chinese government set the economic growth target for 2022 at about 5.5 per cent, which is lower than the previous year's 8.1 per cent, which exceeded the government's 2021 target rate of 6 per cent.

In the euro zone as a whole, the inflation rate recorded a new record in March, reaching 7.5 per cent; this rate is still driven by energy prices, which jumped 31.7 per cent in February. 

The European Central Bank sharply lowered its forecast for GDP growth in the Euro zone for 2022 at 3.7 per cent, while greatly raising its forecast for the inflation rate at levels of 5.1 per cent due to the expected economic repercussions of the war in Ukraine. European Central Bank President Christine Lagarde said the Russia-Ukraine war "will have a significant impact on economic activity and inflation, by raising energy and commodity prices, disrupting international trade and undermining confidence".

In the Latin America and the Caribbean, growth rates are expected to reach only 2.1 per cent this year, compared to 6.2 per cent last year, and high inflation rates will be recorded this year, driven by increases in food and energy prices.

In the MENA region, there are continuous price hikes and modest rates of economic growth, but it is not expected to reach a state of stagnation.

In sum, there is a discrepancy in the performance of regions and countries. On average, there will be high inflation rates driven by high energy and food prices and imbalances in supply chains. On the other hand, economic growth rates will in most cases be positive, but they will not be high in order to reduce high unemployment rates.

According to these readings, the possibility of the global economy entering a state of stagflation is now excluded, but it depends on a set of factors, the most important of which are; the continuation of the Russian-Ukrainian crisis, the world’s ability to address the imbalances in distribution chains, and the possibility of increasing economic productivity in certain countries to compensate for the decline in growth in others, whose contributions were tangible in the global economy.

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