"Anyone who believes that central banks should halt interest rate hikes lacks an understanding of history"
Global Inflation Resurgence: Insights From Clal Insurance's Head Of Marketing
During the 90s, the United States experienced an average inflation rate of approximately 2%. However, in 2020, the COVID-19 pandemic caused inflation to skyrocket to 9%. The pandemic had a significant impact on the global system, resulting in lower production, reduced consumer activity, and disruptions in supply chains. The Russia-Ukraine conflict further worsened the situation. Although inflation has since decreased to around 3%, Amir Argaman, the Head of Global Marketing Strategy at Clal Insurance, emphasized that we cannot solely attribute this decline to these factors. These remarks were made during the National Economic Conference organized by Calcalist and Bank Leumi.
From 2008 onwards, we have become used to the U.S. central bank creating money and keeping interest rates low. In 2020, this strategy intensified as governments infused significant funds into the worldwide economy. These amassed funds have resulted in a rise in demand in recent times. Individuals who previously abstained from buying cars or traveling are now returning to these activities. As a result, we have shifted from inflation due to limited supply to inflation fueled by increased demand. Moreover, this type of inflation, known as sticky inflation, particularly in the service sector, carries long-lasting consequences that should not be overlooked.
Take, for instance, if a property owner raised the rental fee by NIS 500, it is improbable that they would undo the choice. This is the hurdle that central banks encounter. Those individuals who push for significant increases in interest rates frequently fail to grasp the intricacies of the situation. Over time, high interest rates can have adverse consequences on the real estate market, businesses, and spending. People with mortgages have less money available for spending, which impacts overall economic stability. Central banks are confronted with a challenging mission: managing inflation that is influenced by past occurrences, meanwhile, the effects of interest rate modifications can take anywhere from 12 to 18 months to become evident.
As a result, it is difficult for central banks to fully manage the situation. Therefore, what can we anticipate from them? Those who believe that central banks should take a gentler approach and stop raising interest rates do not grasp the lessons from history. A central bank that raises interest rates too quickly and withdraws support prematurely runs the risk of causing high inflation rates. Every now and then, the market creates its own stories, such as the impact of artificial intelligence (AI). While some people argue that AI can enhance company efficiency, its actual advantages may be more limited. Let's take Zoom as an example. During the pandemic, Zoom became crucial for remote meetings, resulting in a significant surge in its stock value. However, its subsequent 90% decline highlights the volatility and uncertainty of markets. Inflation is mostly under control, but central banks will remain cautious until the situation becomes more stable.
