The Muamalat Newsletter Vol.1 2023

FEM Newsletter | June 2023 42 Introduction Grocery store inflation continues to rise in early 2023, despite the global expectation that inflation is going to soften up post-pandemic. Some of the factors contributing to this situation are a disrupted global supply chain, global energy price shocks, the Ukraine- Russian war, and climate- change related extreme weather conditions. A recent study by the Bank of International Settlement suggests that the rise in inflation since mid-2021 are caused by expansionary demand conditions and tight supply condition in the case of the United States (US) and the Euro area. The study recommends that tighter monetary policy and financial conditions will reduce both demand and supply pressures on prices. To deal with demand pressure, tighter monetary and fiscal policy could help. However, on the supply side, policy trade-offs are required. In Asia, inflation is caused by a mix of different reasons in early 2023. In Australia, the reason is the increase in the cost of holidays that coincided with seasonal holidays. In India, rising wheat prices were the main reason. Japan’s inflation is due to its ultra-easy monetary policy driven by supply-side factors. In the case of the Philippines, the reasons are combinations of all the above factors. Inflation also remains high in Vietnam, Taiwan, South Korea, and Singapore (Carnell, 2023). Rising Inflation In late 2021, there was concern that inflation was on the rise worldwide after decades of moderate inflation. The most obvious case in point is Brazil and the US. In Brazil, during the COVID-19 pandemic, the price of rice rise manifold and was considered gold. Meanwhile, the US saw an unprecedented rise in inflation to almost 6% as of the end of 2021 after enjoying decades of low inflation. What are the factors contributing to the rising level of inflation? Inflation is seen as the general increase in price level and is normally measured by the Consumer Price Index (CPI). According to the research conducted by the International Monetary Fund, the rising inflation rate in 2021 are due to several key factors. The trigger is the pandemic, which has disrupted the global supply chain. However, inflation could be caused by many other reasons, such as rising consumer demand, profiteering, labor shortages, rising consumer demand, expansionary monetary policy, and others (Braun, 2021). Another contributing factor is consumers’ and producers’ behavior. During the pandemic, consumers purchased goods in larger quantities. They are hoarding goods, rather than reducing demand. Producers are responding to the increase in demand by raising prices. The cycle continues to become self-fulfilling expectations. What Drives Inflation? Author: Assoc. Prof. Dr. Nursilah Ahmad Faculty of Economics and Muamalat Universiti Sains Islam Malaysia