The world inflation

Germany was just reported to experience the fastest inflation in the last four years; moreover, many other European countries and America are also experiencing increased inflation rates according to the reports. Therefore, it is fair to say the world inflation is increasing since the last quarter of 2017. It is uncertain whether the ECB will maintain its current expansionary monetary policy or reduce; however, the US Federal Reserve has publicly announced that the rate hike in March is a significant probability which means the base rates will be raised in March for almost 100%. Moreover, many experts have expected that many countries will focus more domestically; therefore, protection tariffs and subsidies will lift the prices of exports and this will add more inflationary pressure to the world economy. However, I think that the inflation comes from another even more important factor: the previous expansionary monetary policies.

Previously there was a long period of continuous expansionary monetary policies including close-to-zero interest rates across the world. However, there was a period of time when the confidence in the financial market was relatively low and the investment behaviour was more passive rather than aggressive, the bond market was more attractive than the equity market and other more risky financial markets. Since Trump was elected, many investors are expecting lower regulation and more tax cuts, so their investment behavior becomes more aggressive, especially in the US, as more investors have moved their attention from the bond market to the equity. In addition, many countries are announcing some good economic performances, including China and some European countries. This could lead more investors to invest more and more aggressively. Such change of behaviour will lead more hot money into markets, this could drag up market prices as well as the inflation rates.