Inflation is turning into a huge problem for the world economy this year.
Some countries are facing the heat of rising inflation, while some others are struggling with falling inflation. Both situations pose challenges for economies.
In countries where inflation continues to rise, higher prices will slowly but surely bite into purchasing power, which will push up interest rates and eventually, curb consumption. Indeed, that’s exactly what’s happening in many emerging economies, such as India, Indonesia and Brazil.
On the other end of the spectrum are countries that are staring at falling prices/falling inflation (declining rate of prices increases). The eurozone, for instance, is a good example. Consumer price inflation for the 18-currency bloc has slumped to a lowly 0.7% and there is increasing speculation that the European Central Bank might be forced to take decisive action sooner rather than later.
Falling prices aren’t such a great thing for an economy as you might initially imagine. That’s because declining prices prompts consumers to postpone purchases, which leads to lower current consumption – and production. That’s bad news for an economy such as the eurozone, which is counting on a pick-up in economic activity to pull itself out of a long slowdown.
Here’s a map on what I call the ‘great inflation divide’ in the global economy. The data has been taken from the International Monetary Fund (IMF) database and uses the latest data available. The countries included in the map are those whose inflation rates are available with the IMF.
(Click on the image below to take you to a new page showing some major economies and their latest inflation rates. Click on each country to view its inflation rate.)
As you can see, lower inflation and the threat of deflation is primarily a threat for developed nations, while rising inflation is more of a threat with emerging economies.
Complicating the sticky economic situation is the threat of El Nino – a troublesome weather pattern that tends to play havoc with global food production by triggering floods and famines. If El Nino does strike with full fury, we’re going to have to deal with higher food prices as well.
And that will cause problems for everyone. Like I said, 2014 is going to be a troubling year for the global economy.