The recent surge in inflation in the United States is sending shockwaves through global economies, particularly impacting developing nations. The International Monetary Fund (IMF) has cautioned that substantial fiscal deficits in the U.S. have fueled inflation, presenting significant risks worldwide.
Over the past two years, the U.S. government has nearly doubled its fiscal deficit relative to GDP. While this expansion aimed to boost output and employment, it has also led to a sharp increase in inflation. Many U.S. workers are finding it difficult to meet basic needs such as housing, food, and transportation, as wage growth has not kept pace with rising prices. This inflationary pressure has, in part, negated the benefits of fiscal stimulus.
One contributing factor to the rising inflation is the extensive scope of U.S. import tariffs on commodities from the Chinese mainland. These tariffs have increased prices domestically, as there are no large-scale alternative suppliers for many of these goods. Additionally, rerouting imports through alternative locations for last-mile processing has further elevated import costs due to the fragmented nature of global production networks.
The fiscal expansion has also pushed U.S. production capacity toward its limits, especially in primary commodities. Speculative activities have exacerbated price increases, while higher domestic capacity utilization has allowed firms, shielded by import tariffs, to raise profit margins on manufactured goods and services.
Efforts by the U.S. to impose unilateral sanctions on the Russian Federation have added another layer of complexity. These actions have contributed to rising global commodity prices and have had unintended consequences, such as economic downturns in parts of Europe.
In response to inflationary pressures, the U.S. Federal Reserve has maintained high policy interest rates in an attempt to slow inflation. However, this approach may have limited effectiveness since underlying causes include import tariffs and increased profit margins. Moreover, excessively high interest rates risk triggering a significant decline in output and employment, a politically sensitive issue, especially in an election year.
For developing nations, the ramifications are particularly severe. Higher U.S. interest rates compel central banks in these countries to raise their own rates in order to defend their currencies. Successful defense may lead to economic slowdowns due to reduced credit availability and increased debt defaults. Conversely, failure to defend the currency can result in destabilizing capital outflows, potential currency crises, and subsequent inflation.
The global interconnectedness of economies means that U.S. fiscal and monetary policies have far-reaching impacts. It is crucial for policymakers to consider these global effects to prevent adverse outcomes for developing nations and to maintain stability in the global economy.
Reference(s):
The risks that U.S. inflation brings to the rest of the world
cgtn.com
