We all hoped that 2022 would be the year of return to normalitywith covid-19 continuing to be a concern but not a threat.In economic terms, the expectations pointed to considerable global growthcontinuing the year 2021, with an economic dynamic boosted by increased consumption (higher demand), the creation of jobs and the real rise in wages.
2022 – Unexpected event
The projections for the year 2022 were based on the data that were known, but as the world is dynamic, situations always arise that we do not expect. The Russia-Ukraine conflict has been an important issue in the period we are going through.. We haven’t had a conflict in Europe for many years, which in itself is a differentiator. The fact that they are two countries with great influence in the energy sector makes this conflict even more relevant, not only for Europe but for the whole world. Finally, in geopolitical terms, an event with this relevance will end up having an impact, and it remains to be seen what the real consequences will be in this field.
Rising prices of goods and services
The year has also been marked by a general increase in the prices of goods and services or in other words, by inflation, something we haven’t seen for many years. This fact arose for several reasons, most of which are linked to the emergence of Covid-19. The massive injection of liquidity, the support provided by Central Banks, as well as the reduction of interest rates to zero, allowed the world economy to overheat, with an increase in consumption and, consequently, in demand. To complement, the widespread confinements also created disruptions in supply chains that gave rise to higher costs that were reflected in the prices of goods. Read also: Central Banks: Chasing the loss
Skewed or completely wrong projections
Bearing in mind the tools that Central Banks have at their disposal, it is difficult to understand why most monetary entities were unable to anticipate the abrupt increase in Inflation. Could it be that they didn’t because in the last 20 years inflation never appeared, regardless of the different stimuli that were being created? This may be an argument, but the reality is that monetary authorities had a perfect idea of the scale of support they had provided since 2020 and that are not comparable to any other similar period. Another pertinent question that we must ask is whether decision-makers would be more concerned about a possible turmoil in the financial markets or with the real economy. This point is relevant because in the last two years we have seen abrupt valuations of companies, growth in segments such as the real estate market or cryptocurrencies, without there having been the respective reflection on the main street. Also read: The first steps in the cryptocurrency market
It was necessary to act quickly
Throughout 2022 we have witnessed a constant loss of purchasing power by the population, since inflation is between 7% and 9%. This means that at the end of this year, if we have money sitting in the bank, not only has it not appreciated but, on the contrary, it has had a devaluation corresponding to inflation.After many months of inaction, the monetary authorities realized the urgency of the situation and acted aggressively in order to regain control of inflation. As an example, in the US the Fed (American Federal Reserve) has already raised rates to 2.5% and in Europe we have seen the first increase of 50 basis points. Read also: Why invest in the long term?
where are we standing
What are the consequences for each of us? of all this context that we are going through and the “medicine” that is being applied to bring us back to controlled inflation? First of all, regardless of the rise in interest rates by the monetary authorities, the reality is that the adjustment that inflation will have to make may be slow, even because of the Russia/Ukraine conflict which has a huge weight on energy prices. Analyzing our day to day, there are several consequences that we are already beginning to feel. If we compare the prices of goods in the pre-covid with the post-covid, we realize that inflation is already starting to be felt in practically everything, in the supermarket, in fuel, in electricity, …. Ie, with the same money we can buy less goodswhich will force us to rationalize our options. Another factor that may affect our budget is the increase in interest rates. Those who are in debt will have higher financing costs. In short, we have two effects that take away our purchasing powerthe first inflation and the second the cure for inflation (increase in interest rates). analyzing the global and real economy, which is characterized by a high level of indebtedness, we may be close to going through a period called stagflation and which consists of reduced economic growth, a high inflation rate and rising unemployment. Also read: Inflation and stagflation: causes and consequences Finally, observing the behavior of financial markets in recent years, we realize that economic stimuli have much more impact and preponderance on the performance of different assets financial than the respective economic indicators or financial results. In a scenario of accentuated liquidity reduction, we may witness a high volatility continuity in the different investment segments and geographies.