The International Monetary Fund (IMF) has cautioned that the United States' substantial fiscal deficits have fueled inflation, presenting significant risks for the global economy.
Over the past two years, the U.S. government's fiscal deficit has nearly doubled as a fraction of GDP. While this expansion has increased output and employment, it has also driven up the rate of inflation. Many U.S. workers are struggling to meet basic needs such as housing, food, and transportation, indicating that the rise in inflation has partially negated the stimulating effects of fiscal expansion.
One contributing factor to inflation is the U.S. import tariffs on commodities from the Chinese mainland. These tariffs have increased U.S. prices due to the lack of large-scale alternative suppliers, forcing imports to undergo last-mile processing in alternative locations and further driving up costs.
Additionally, fiscal expansion has led to capacity constraints for certain commodities. Speculation has driven up prices for primary commodities, exacerbated by U.S. policies aimed at imposing sanctions on the Russian Federation. These sanctions have inadvertently caused economic strain in Germany and broader European economies. For manufactured goods and services, increased domestic capacity utilization and protected U.S. firms have led to higher profit margins.
In response, the U.S. Federal Reserve has maintained high policy interest rates to curb inflation. Moreover, these higher rates may be an attempt to delay de-dollarization. However, the elevated interest rates alone are unlikely to control inflation, as it is driven by import tariffs and increased profit margins.
Elevated interest rates could help rein in inflation but may also cause significant declines in output and employment, a challenging prospect during an election year.
Globally, high U.S. interest rates are impacting developing countries as their central banks raise rates to defend exchange rates. Successful rate hikes may lead to domestic economic slowdowns, while unsuccessful attempts can result in capital outflows, currency crises, and further inflation.
Reference(s):
The risks that U.S. inflation brings to the rest of the world
cgtn.com
