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  • Writer's pictureCrest Economics

High inflation as the tipping point into global recession – July 2022

At the root of record high inflation in most nations is a broken global economy. The Russia-Ukraine war, US tensions with China and the chaos leftover from Brexit are unequivocal signs that the era of deglobalisation has arrived, citing in higher long-term inflation with it. A decoupling of ties between countries and the paradigm shift towards onshoring will see governments and firms reduce their dependencies on international trade and the withdrawal of global supply chains that have seen economies of scale accrue. The past few decades of globalisation have had deflationary forces whereby trade and migration between nations have acted to reduce labour and materials costs, leading many critical consumer prices to fall.

Inflationary pressures have been building up and continues to boil to new heights. Latest inflation data in the US has gone up to 9.1%, driven by an increase in gasoline prices, up nearly 60% over the year. Electricity and natural gas prices also rose, by 13.7% and 38.4% over the same period with household goods increasing by 12.2%. Real wages have resultingly slumped 1% from May to June and are down 3.6% from June 2021, inflation outstripping wage gains.

This has incited US interest rates to jump for a second time this year, with economists expecting a range of 2.5 – 2.75%. Higher interest rates in the US make it a more attractive place for investors that will see greater demand and causing the price of dollars rocketing higher. This will place greater pressure on imported inflation and borrowing costs, further igniting a chain of increased costs that may topple global growth.

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