The future global inflation and interest rate

Currently, across the world, many countries are experiencing low inflation rates and low interest rates and in some countries, some banks are forced to lower their interest rates below zero as the low interest rate makes their lending businesses less profitable. However, the globalization and free trade process are slowing down and even reversed; therefore, exports and imports are very likely to become more expensive, then the inflation rate around the world will increase due to the rise in import prices.

When the inflation rate increases, will the public consumption increase? The answer is not necessary. Because, based on very simple demand and supply model, when the price increases, the demand will fall, so the consumption will drop. Of course, when people are expecting the price will continue to increase in the future, people will be willing to spend their incomes as soon as possible. However, there is another theory called diminishing marginal utility that especially in the developed countries, people's living standards have reached certain levels that additional consumption has diminishing marginal utility; therefore, when they may focus on the short-term impact - the price increases on something they do not necessarily need, but ignore the fact of there may be a continuous inflation over time. This will affect companies' revenues and they will decide to lower their costs but the profit will decrease. Therefore, a sharp increase in inflation could be temporary in many developed countries, but later the price level will be stable again while the profits earned by the businesses will decrease.

In this case, it makes running businesses more difficult, so many countries will like to continue their low interest rate monetary policy in order to lower business borrowing costs. This will continue to be ineffective.

Overall, the future global inflation will increase to a certain level that covers some increase in the costs due to imposed import taxes then stay at that level without much fluctuation. However, the possible increase in the base rate by the US Federal Reserve may make a difference that it may bring down some big businesses and cause violent fluctuations in the financial markets, especially the bond market and the stock market.