Inflation remained a key theme for the global financial system in the year 2022, and it continues to illude the central banks across economies.

Due to Covid 19 pandemic, the global economy came to a standstill. Other than essential services, all other services were closed, which affected the businesses as well as individuals in terms of earnings and wages, respectively. Due to the Covid pandemic, there was a disruption in the supply chain. This affected a wider range of products. Manufacturing companies faced difficulty in sourcing raw materials, components and workers to keep up with demand. In addition, transport challenges mounted, including a backup of shipping traffic in some ports and a shortage of truckers to haul freight over long distances.

There was an unprecedented impact of the pandemic which led to a deep recession across the globe, resulting in the contraction of the global economy by 4.3 percent in 2020. To contain the impact of the pandemic and help support the growth recovery, Central Banks and National Governments across the globe embarked on a path of easy monetary policy and expansionary fiscal policy, which resulted in a condition of surplus liquidity and historic low levels of interest rates in the global financial system. In view of the same, most of the governments, under their emergency policies, gave financial support to businesses and individuals to weather pandemic-related economic challenges.

Households’ savings improved due to procrastination of consumption coupled with the support of these policies. Consumers who were unable to spend money on services and leisure activities such as eating out, visiting clubs or gyms, travel, party and wedding expenses, etc started to spend after the normalisation of Covid on these items, including cars, houses and accessories. This resulted in a surge in demand in specific segments of the economy, leading to outpacing supply. These pandemic-related supply disruptions and limited production resulted in a scarce supply of desired goods.

Post Covid when pent-up demand came, supported by surplus liquidity and easy finance, inflation started peaking. This led to a dramatic surge in inflation to multi-year highs all over the world from the second half of the calendar year 2021, as economies recovered from the impact of the pandemic and saw a rapid rise in consumer demand as industries struggled to normalise operations amid labour shortages. The supply disruptions following an escalation of the Russia-Ukraine war protracted shortages of critical inputs to industries, and a surge in commodity prices further fuelled the inflationary pressures.
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