InstaForex

November 2, 2021

Alan Greenspan expects short-term inflation to remain high

 Inflation, Nonfarm Payrolls, and the Federal Reserve's monetary policy are of key importance to traders and investors at the moment. After all, monetary policy depends on macroeconomic data. This week we will either find out the Fed's decision on monetary policy or will get another portion of hints and promises. Before that, let's talk about inflation and not only in the United States but across the globe. It comes as no surprise that the inflation rate is accelerating in the US, the EU, the UK, or Russia. After governments and central banks had pumped their economy with enormous sums of money, the money supply increased in every country. And when the money supply rises and production does not, national currencies begin to devalue. In addition, global demand for all possible kinds of products plunged during the pandemic. Consequently, the production of goods and the supply of services declined worldwide. Even now, when the economy has been recovering for quite a long time, as well as demand for goods and services, businesses and production cannot always keep up. Therefore, they lag behind improving demand. In other words, prices for some kinds of goods and services are growing due to shortages. And it is not about shortages the United Kingdom is now facing. The situation there is different due to Brexit-related issues.


Above all else, energy, fuel, and electricity prices are rising, thus boosting the value of other products and services. After all, energy, fuel, and electricity are needed to manufacture any other kind of product or service. Stock markets, the crypto market, and the retail estate market are also on the rise. The economy is oversupplied with money, and investors do their best to save their capital from inflation, investing in all possible instruments, thus increasing their demand and value. Under such circumstances, it remains to be seen how the US and the EU will respond.


So far, Alan Greenspan, the former Fed chair, says inflation is likely to remain high longer than many analysts anticipate. He pinpoints that the pressure from core inflation on the inflation rate will remain intense. "Monetizing the debt cannot be a long-term solution, and increases in the money supply relative to the real goods and services an economy produces will eventually lead to higher price levels," Greenspan said. In the past 18 months, the former Fed chief said the US debt steadily outpaced the country's GDP, lifting the debt-to-GDP ratio. "The tendency toward inflation remains, unfortunately, well above the average of about 2% over the past two decades," Greenspan summarized.