Economic recovery from Covid-19 Will Likely Bring Higher Inflation

At the end of the pandemic, it is expected to face higher inflation. A sudden disturbance in the synergy of demand and supply after the outbreak of pandemic has put the movement of the economy at a halt. Thanks to the quick thinking of the country’s representatives that they have been able to help millions of people bounce back – at least to prepare them to be able to feed themselves.

A dropdown in tax revenue is constantly making it harder for the government to take big decisions and vaccination distribution is taking a toll on it. Most of the people have a conviction that the pandemic will cause inflation down the line, but the fact is that it has already led to a lot of inflation.

It does not need to be in the form of rising prices. When the quality goes down, it also reflects a sort of inflation. Most educational institutions have not raised tuition fees and online presence is not as effective as classroom teaching.

A visit to restaurant and hospital is causing a lot of inconvenience. Consumer life has been badly affected in many aspects and this is equivalent to price hike.

There are some experts that suggest the inflation rate can go up between 4 and 6%. However, some argue against this speculation because they believe that Covid-19 has put a lid on demand.

Reasons why the economy is going to face higher inflation

The current global monetary and fiscal easing is likely to increase inflation sooner rather than later. Money printing is sky-rocketing and this will lead to a surge in money supply globally.

After the outbreak of pandemic cross-border trades have been stopped, meaning less globalization. This is likely to increase inflation down the line.

Collapse in the manufacturing sector has distorted the normalcy of supply and if the demand for such products will ever increase, you see inflation.

Where can inflation appear first?

Not the entire globe is going to face inflation at the same time and the inflation rate may vary from country to country. This is because the strength of the economy. Experts say that inflation is likely to be experienced by those countries that have seen a severe drop in the valuation of currency.

The USA is one of them because the dollar has been supported by favourable interest but this is not the case currently. Further, the fiscal and current account is about to go up to 20% of the GDP, which means dollar weakness will be inflationary not only for the USA but for the entire globe.

The UK is also not going to escape post Covid-19 inflation. However, it is expected that high inflation rate is not going to be a serious concern for developed nations. According to the survey, inflation in 2021 is going to be much higher with household expenses.

It is expected to reach up to 3.8% in 2021 and exceed in next coming years. The survey has also found that inflation has been downward with Euro currency since 2015 and it suggests that there can be a few other factors for the UK to experience high inflation, for instance, Brexit.

Inflation is not to be seen in all sectors

Some experts say that the pandemic shock is not contributing inflation to each sector of the economy. This is because demand is falling down since the pandemic outbreak causing prices to come down. When there is higher supply, prices increase to maintain the balance between demand and supply, but at this time, there is no much rise in demand.

The best example to understand this situation is oil industry. The demand has dropped by 33% and hence the prices are not likely to go up. Since demand is not much, it forces companies to sell their products and services at normal prices.

They will likely offer discounts to encourage people to buy commodities. This is why it cannot be straightaway said that inflation is hitting every sector of the economy. However, deflation does not mean that economy is healthy and you will see tremendous and faster growth in the economy.

For instance, the unemployment rate has hiked by over 10% and most people are relying on benefits and online installment loans. With gradual economic recovery, most of the people have landed a new job and some of them have begun their start-ups with business bounce back loans. Since the lifting of lockdown is slower, the economic growth will also be slower.

Is it possible for the economy to bounce back without inflation?

It is essential to understand the fact that economic activities are run with innovation and technological development rather than inflation. Of course, countries will invest in healthcare infrastructure as a result of the crisis due to pandemics.

You are going to see a drastic improvement in innovation and technology. This will also generate new employment opportunities, which means more money circulation and more development. Remote working technology is also improving as a result of the pandemic. This all is a part of growth and it will lead to economy boost to some extent.

The bottom line

This is not going to be the first time that the economy will reshuffle all its resources and invest them in where there is growth. As far as it is about inflation, there are still various areas where you will likely see high prices.

Even though you cannot be absolutely sure about the hike in prices down the road. you will likely see a hike in the prices of utilities, taxes, duties, and administration charges. However, at the same time, the prices that increase as a result of inflation in the coming months will be offset by a sharp fall in prices.

There are some uncertain elements that include clothing and footwear. Even though there has been a financial crisis during the pandemic. the prices of clothing have not fallen much and they are still expected to rise. It all depends on consumer spending.

In the nutshell, inflation will affect certain areas but if you compare it with the prices of last year that dropped, you will see it is not much significant.