Mondial Dubai - Chart Of The Week

Runaway inflation is no joke


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What does the chart show?

Inflation remains one of the key concerns in markets. The chart shows the US, Turkey, and Sri Lanka Consumer Price Index (CPI) year-on-year over the last five years. June inflation numbers once again surprised on the upside in the US at 9.1% year-on-year (vs 8.8% expected), its highest reading since November 1981. The surge in inflation is due to a mixture of supply disruptions, elevated global demand, as well as surging energy prices following Russia’s invasion of Ukraine. The inflationary surge has not been limited to the US – Europe and the UK are also experiencing red-hot inflation figures (with UK inflation hitting 40-year highs this week). However, Turkey and Sri Lanka are battling far worse economic situations, facing whopping 78.6% and 54.6% year-on-year rises in prices respectively. While external macroeconomic factors are partly to blame, internal politics and poor policy-making have exacerbated matters and resulted not just in economic catastrophe, but also in the collapse of the Sri Lankan government. 

Why is this important? 

Global inflation has led to many central banks tightening monetary policy and raising key interest rates. Turkey is facing similar surges in consumer prices, reaching levels not seen for 24 years. The central bank was forced by president Recep Tayyip Erdoğan to slash interest rates towards the end of last year, exacerbating existing inflationary pressures. Deteriorating confidence in the country has also worsened the inflation backdrop with the currency plunging versus the dollar; consequently pushing up import costs and intensifying price growth. Of course, the US is a much larger, diverse and more established economy than Turkey and Sri Lanka combined, so we should be careful about drawing any parallels. However, policymakers should take note of just how quickly inflation can get out of control if it is not contained quickly, or if central bank independence is jeopardised.
 

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Mondial Dubai - Chart Of The WeekBy Mondial Dubai