Inflation is a global problem. At the end of August, it was 8.3% in the US and 9.1% in the Euro area. It is 20.3% in Nigeria, 25% in Malawi, and over 30% in Ethiopia and Ghana.

The impact on Africa is devastating. The International Energy Agency estimates that by the end of the year 30 million more Africans will be unable to afford fuel for cooking. The World Bank estimates the number of Africans living in extreme poverty will increase from 424 million in 2019 to 463 million this year.

There is no agreement on why this is happening. Some argue that it is primarily a supply side problem. The dislocations in supply chains caused by the effects of the COVID pandemic and the war in Ukraine have reduced the available supply of goods like fuel, fertiliser and food, forcing their prices up.

Others maintain that it is primarily a consequence of the loose monetary policies of leading central banks like the US Federal Reserve (Fed). For a number of years they have kept interest rates low and engaged in quantitative easing. This involved buying bonds on financial markets to increase the funds available to financial institutions like commercial banks, investment banks, asset management firms, private equity firms, hedge funds, pension funds, insurance companies, money market funds, and sovereign wealth funds.

These two groups also differ on how to manage the problem. The first group argues that it will diminish as the supply side issues are resolved. They maintain that the current high prices will incentivise companies to increase production. The increased availability of goods like food, fuel and fertiliser, will ultimately lead to their prices – and inflation – falling.

The second camp argues that central banks should raise interest rates and unwind quantitative easing. They argue that these actions will make it more expensive for companies, households and governments to borrow. This in turn will slow the economy down and reduce demand (and potentially employment). This, they maintain, will drag prices lower and end inflation.

Read more:

https://theconversation.com/three-reasons-why-the-us-federal-reserve-bank-holds-the-world-in-its-hands-190936