Is inflation really peaking?

AMERICAN Nobel laureate and economist Milton Friedman once said: “Inflation is taxation without legislation.” If so, global economies faced one of the most trying periods of taxation over the past one year. Even today, 85 per cent of economies worldwide are still grappling with an inflationary environment, with domestic inflation rates stubbornly over 2 per cent.

The inflation rate is a year-on-year calculation of the weighted average of a basket of consumer goods most representative of households in an economy. With Singapore’s June 2022 headline inflation rate at 6.7 per cent, it would mean that an item costing S$100 in June 2021 would be priced at S$106.70 just one year later. Households will need to pay a S$6.70 premium to enjoy the exact same product. When viewed in this light, inflation is indeed a tax on consumption.

The US’ headline inflation rate finally slowed somewhat to 8.5 per cent year on year in July, retreating from a 4-decade high of 9.1 per cent just a month earlier. Given the elevated inflation rates, households’ purchasing power will continue to be eroded. Negative income effects (where households decide to consume less, and/or downgrade quality) will also dampen economic growth, which will eventually put a lid on consumer prices. Between now and then, US policymakers will continue to be hawkish in their policy stance.