UNIVERSITY OF HERTFORDSHIRE

TITLE: CAUSES OF RISING INFLATION IN DIFFERENT PARTS OF THE

WORLD, AS WELL AS THE MONETARY POLICY INSTRUMENTS
AVAILABLE TO CENTRAL BANKS TO COMBAT IT
STUDENT ID: 20053733
MODULE TITLE: THE GLOBAL ECONOMY
MODULE CODE: 7BSP0353-0901-2021
WORD COUNTS: 1231
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Inflation is one of the most debated and misunderstood terms in national economics.
Many politicians have risen to power on the promise of taming this economic construct,
only to lose their power as a result of their inability to do so. (Oner, 2010). Inflation,
however, is not just the most discussed concept but has become one of the most
important macroeconomic variables that important economic parastatals, including the
government, have come to fear as it has the ability to negatively impact the structure of
production costs and overall costs of living in the country. We can see examples of
these across several countries and societies. For instance, in 1998, Indonesia faced
one of the most challenging years in its economic history as a result of a belligerent
inflation rate of approximately 78 per cent coupled with the fall in their currency, the
Rupiah’s value, relative to the value of other foreign currencies and other unsafe socio-
political factors that caused the relative prices of goods, products and services to go on
a sharp increase until the end of the year 1998 (Yolanda, 2017). The United States has
also experienced its fair share of inflation as inflation in the country has been on a
constant rise since the end of the Second World War, a stark contrast to the state of its
economy in the years prior to the war (Labonte, 2011). Some countries also experience
a rare phenomenon known as hyperinflation where there is a presence of abnormally
high rates of inflation. Zimbabwe is one such country that has experienced one of the
worst cases of hyperinflation ever, with an annual inflation quota reaching a mind-
boggling 500 per cent and Zimbabwe having to undertake drastic monetary policies
including foregoing their currency to save their economy.

What is Inflation? Why do governments and leaders fear it? What causes it? What are
the policies that can be effected to decrease its rise or mitigate its influences on the
economy? These are the questions we aim to answer in some capacity in this essay.

To understand the importance of inflation and its impact on every economy, the concept
of inflation has first to be understood. The Congressional Research Service defines
inflation as a general increase in the overall costs and price of products and services or
the overall decrease in the value of money across the country’s economy (CRS, 2021).
In simpler terms, inflation is a representation of the increasing expense of relevant
goods and services in the span of a specific time frame, typically a year.
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Several factors contribute to the rise of inflation all over the world. In the United States
of America, it is a given that whenever there is a significant change in price levels, then
a resultant change in the money supply would simultaneously follow (Mishchenko et al.,
2018). This constant phenomenon spurred the school of thought that Inflation is a
monetary occurrence that results and is frequently accompanied by an upsurge in the
amount of money in circulation relative to output (Labonte, 2011). This paradigm
effectively prompted and created consistency with seemingly opposing views on the
cause of inflation. One of these opposing views posits that Inflation as a function of
rapid or sudden growth in the supply of money is either a by-product of flawed policies
of the Federal reserve or deficits of the financial budget through money creation and the
subordination of the Federal reserve to the fiscal necessities of the federal government
(Laryea and Sumaila, 2001). The opposing view theorises that the upward movement in
the price quotas results from activities that would see a fall in the eventual output. An
example of such activity would be the demand for increased wages by organised labour
in the United States, the price monopolising behaviour of OPEC, or changes produced
by the decline in the dollar’s foreign exchange value (Labonte, 2011).

Other studies also suggest varying drivers of the spike in global inflation. Ha, et al.
(2019) suggests in their study that a driver of global inflation can be seen in its
significant movements over swings in oil prices and the global business cycles, which
are driven by global supply and demand related shocks in tandem with oil price shocks.
However, the primary causes and drivers of the increase in global inflation vary across
countries and economies, especially when comparing advanced economies (AEs) and
emerging markets and developing economies (EMDEs). A case study of the non-
application of the “overheating” diagnosis prevalent in the United States in many
EMDEs which had a more limited fiscal and monetary response to the recent COVID-19
pandemic and are experiencing a decidedly lagging economic recovery compared to the
rebound exhibited by many AEs. The inflation resurgence in the aftermath of the
pandemic reinforces the inequality within and across nations (Reinhart and Luckner,
2022).
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Central banks the world over have to implement policies that effectively control or
mitigate the effects of inflation on their economies. Central Banks use these monetary
policies to manage the supply of money within the economy. They are the bedrock of
every country’s economy and the shifts in these policies have a significant impact on
every member of the economic society, from giant corporations to the part-time grocery
store worker (O’Connell, 2021).

Depending on the economic circumstance, monetary policies can be grouped into two
categories; Expansionary Monetary Policies and Contractionary Monetary Policies.

Expansionary Monetary Policies (EMPS), otherwise known as the loose monetary

policy, implements monetary policy tools such as the lowering the federal funds rate,
leveraging open market operations, lowering reserve requirements, and increasing the
supply of cash and credit by increasing discount rates in order to drive economic
growth. This policy can be implemented as a ploy to curb rising unemployment quotas,
incite growth in the event of economic hardships and reduce inflation (Mathai, 2020).

Contractionary Monetary Policies (CMPs), alternatively referred to as tight monetary

policy, is the opposite of CMPs. This policy decreases the money supply in circulation in
a country’s economy. When this policy is effected, it usually sees a hike in interest rates
and an increase in reserve requirements to discourage banks from loaning out more
and effectively slow the growth of the currency’s value and the prices of goods and
services (Ross, 2021).
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Figure 1: Monetary Transmission Mechanisms (European Central Banks, 2016)

The figure above shows the transmission channels by which the monetary policy
decisions implemented by the central banks affect the economy of a nation and its
inflation quota.
Inflation and monetary policies implemented by central banks are inexplicably
intertwined in recent times as inflation targeting has since the 1980s become the
foremost framework and driver for monetary policy. Inflation as a concept has become a
very vital aspect of the economic growth of every economy, and central bank in many
countries such as Canada, the United Kingdom, most of the Euro area, New Zealand
and several other countries have begun to use inflation as the benchmark for the
implementation of monetary policies in a process known as Inflation Targeting (IMF,
2022). Constantly monitoring the inflation levels helps central banks regulate the flow,
supply, and influx of money into their economy, the country’s fiscal growth, the value of
its currency, and the subsequent cost of living in the country. Using this thought
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process, a conclusion that inflation as a standalone concept isn’t necessarily negative or

positive, but it is a non-negotiable variable in the growth of every nation’s economy.

References

CRS (2021) Introduction to U.S. Economy: Inflation. CRS. Available at:

https://sgp.fas.org/crs/misc/IF10477.pdf [Accessed: 17 May, 2022].

European Central Banks (2016) Monetary Transmission mechanism photo. Available

at: https://www.ecb.europa.eu/mopo/intro/transmission/html/index.en.html [Accessed:
16 May, 2022].

Ha, J., Kose, M.A. and Ohnsorge, F. (2019) Inflation in Emerging and Developing
Economies: Evolution, Drivers, and Policies. Washington, DC: World Bank. DOI:
10.1596/978-1-4648-1375-7.

IMF (2022) Monetary Policy and Central Banking. IMF. Available at:
https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/16/20/Monetary-Policy-
and-Central-Banking [Accessed: 16 May, 2022].

Labonte, M. (2011) Inflation: Causes, Costs, and Current Status. CRS. Available at:
https://sgp.fas.org/crs/misc/RL30344.pdf [Accessed: 17 May, 2022]

Laryea, S.A. and Sumaila, U.R. (2001) Determinants of inflation in Tanzania. Chr.
Michelsen Institute. Available at: https://www.cmi.no/publications/934-determinants-of-
inflation-in-tanzania [Accessed: 16 May, 2022].

Mathai, K. (2020) Monetary Policy: Stabilizing Prices and Output. IMF. Available at:
https://www.imf.org/external/pubs/ft/fandd/basics/monpol.htm [Accessed: 16 May,
2022].

Mishchenko, V. et al. (2018) ‘Inflation and economic growth: the search for a
compromise for the Central Bank’s monetary policy’. Banks and Bank Systems, 13(2)
pp. 153–163. DOI: 10.21511/bbs.13(2).2018.13.
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O’Connell, B. (2021) Monetary Policy: How Central Banks Regulate The Economy.
Forbes Advisor. [Online] Available at:
https://www.forbes.com/advisor/investing/monetary-policy/ [Accessed: 16 May, 2022].

Oner C. (2010) What Is Inflation? IMF. Available at:

https://www.imf.org/external/pubs/ft/fandd/2010/03/pdf/basics.pdf [Accessed: 16 May,
2022]

Reinhart, C. and Luckner, C.G.V. (2022) The Return of Global Inflation. World Bank.
Available at: https://blogs.worldbank.org/voices/return-global-inflation [Accessed: 16
May, 2022].

Ross, S. (2021) How Does Monetary Policy Influence Inflation? Investopedia. [Online]
Available at: https://www.investopedia.com/ask/answers/122214/how-does-monetary-
policy-influence-inflation.asp [Accessed: 16 May 2022].

Yolanda, Y. (2017) ‘Analysis of Factors Affecting Inflation and its Impact on Human
Development Index and Poverty in Indonesia’. European Research Studies Journal,
20(4) pp. 38–56. DOI: 10.35808/ersj/873.