Just want to share some ideas since we got CPI (Consumer Price Index) release today, 01/12/22, which tracks monthly inflation, but now we have data for the whole 2021 year.
Context is that we saw an insane monetary expansionims, increasing quantitative base supply since 2020 due to pandemic.
Many people think this is the cause of inflation by itself, some people even think that inflation means this (monetary expansionism), but in fact, just by translating some denotative meaning, it literally means rise of prices.
The confusion is that because of this insertion of money in the economy makes demand for goods and services to rise, a stimulus, by theory of supply and demand, that would make prices rise after that, because thoses stuffs would be more scarces, keeping same old factors (ceteris paribus).
Thats why we can also say that monetary expansionism is a false income effect, since income rises first but then we have substitution of prices by demand rise.
This is bad, because if you considerates only few months in account it seens that you gained money, by nominal factors or by this delay in price adjustment. But if inflation rises, lets say, 7% in the year, this means that in next year you will have this input in your daily, weekly, montly cost... So, if you considerate that for also the following years, this for sure will be a long term deficit for your buying power.
So, what central bank does is to rise interests to control inflation, this is a theory based on keynesian model, thats how they do fiscal policies (I'm not debating what is the correct model, you can google the research tab of FED to see that they use this as basis). In short it slows down and constrict the economy, capital cost increases, production gets lower, also level of jobs, and consumption, this tends to control prices. More capital cost and less rentability together with less consumption makes net margins of companies to decrease. Thats why some hedge funds like Ark are forecasting a "deflationary crisis", not good for stock market, and there is a shift for hedge assets. So, it's ok until then, right?! because stocks were going up, real state, commodities... But yeah, reserves of values starts to be a prudent measure.
I won't publish about public debt, bonds issues, tapering, or tributation, because the post would get too long.
But what I really want to share is a reflection:
That this inflation we are seeing is due to an exogenous factor, the opec shock of supply (control of supply), throwing fuels, energy, commodities, food, goods and services to higher prices. OPEC is the Organization of Petroleum Exporting Countries, based mainly in Middle East countries (that are politically unstable enough), they control production and indirectly the price of brent oil, that is used in operational cost for everything, this will cause collateral higher prices due correlation, for ex, others kinds of fuels have more correlation with each other than with water, so natural gas tends to increase more than it. That might be a way for them to cash out while they can since it's a market that tends to decelerate with EV transition, that will also cut future operational costs of everything else. So, if they keep doing that, I'm not sure if interests rates rise will prevent anything.
To complement, this has been happening and we saw the same in the 1973 oil crisis, also by supply shocks from opec embargo, but different circustances, not enought production to supply all the demand, which led to global inflation, more on underdeveloped countries that imports primary and secondary sector equipments and tertiary goods and services. This led to stagflation in those places that only passed in beginning of the next decade. I'm just saying that we have some similar history to study as example of what we are seeing.
Search for 1973 oil crisis pictures.
Just to finish I want to share how it was the CPI this year, and yeap, it was +7% yearly inflation, and +0.5% in december. Surprisingly fuels and energy decreased this month, but fuel was the one that most increased during the year. However everything else went up, food, energy, shelters, cars prices, furnitures, goods and services, medicaments... (Due to previous rise in fuels and energy that are operational cost as I said before, Idk why I'm repeating, but you got the obvious logic), there is an index for each kind of subsector, you can search the full repport released. However, at Brazil we are having +10% yearly inflation...
And also, Idk if increased demand by expansionism was the cause of all that, since people are getting smarter, saving and investing money instead of nobrain spendings.
(In fact, this writing reminds me to make a post about asian crisis and how it led to current trade war China/US, Idk why).