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Student name: Bùi Lê Anh Minh Student ID number: 21000587

Student name: Nguyễn Hoàng Khải Student ID number: 21000751
Student name: Đinh Gia Khánh Student ID number: 21000367
Student name: Phan Hầu Bích Thủy Student ID number: ISB21000045
Student name: Kiều Nhật An Student ID number: ISB21000011
Student name: Student ID number:
UNIT AND TUTORIAL DETAILS

Unit name: Group C Unit number: PE-T222PWB-1

Tutorial/Lecture: Macroeconomics Project Report Class day and time: Thursday 8 AM
Lecturer or Tutor name: Dr. Nguyen Thi Hoang Anh

ASSIGNMENT DETAILS

Title: The Causes of Inflation 2022

Length: 2364 words Due date: August 12, 2022 Date submitted: August 12, 2022

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Student’s signature: Bùi Lê Anh Minh

Student’s signature: Nguyễn Hoàng Khải
Student’s signature: Đinh Gia Khánh
Student’s signature: Phan Hầu Bích Thủy
Student’s signature: Kiều Nhật An
Student’s signature:
 Macroeconomics Project Report
The Causes of Inflation 2022

Group C

Accessed the group presentation video by the link:

https://youtu.be/2vxGD-_TPMw

UEH-International School of Business

Principles of Economics- T22PWB-1
Instructor: Dr. Nguyen Thi Hoang Anh
Aug 12, 20220
TABLE OF CONTENTS
Abstract:
Introduction:
Cause 1: The Value of the Currency
Cause 2: The Gap between the Rich and the Poor
Cause 3: Demand and Supply
The effect of inflation: Recession and Unemployment
Conclusion:
References:
Abstract:
The phenomenon of inflation is not new. Its effects have been extensively examined throughout
the years and have received much study. Its significance derives from money's pervasiveness in
the financial system. Hence, inflation not only has positive impacts on the economic background
but also has negative sides. Nonetheless, It is commonly believed that there are several costs
connected with inflation, particularly with high and fluctuating rates of inflation. Indeed,
decreasing the rate of inflation has been one of the main goals of economic policy for many
Western nations' governments in recent years. It is vital to examine the costs of the measures
used to lower inflation in addition to identifying and estimating the net costs of inflation to
justify these policies. So where do the causes of inflation come from? This paper aims to analyse
the reasons for an inflation in the market nowadays to help to clarify the origin of inflation.

Introduction: 
It is hard to discuss economics without mentioning the incidence of inflation. It is generally
accepted that inflation is considered as a decline in the purchasing power of money or an
increase in generalised prices. The term "inflation" literally means "to blow up or grow larger".
The average price will increase due to the increasing demand for goods and services if the
amount of money in a nation, or the money supply, increases faster than the rate of production in
that nation. After the lockdown period, in the first three months of 2022, the socioeconomic
conditions of many nations were influenced by the continued recovery of the global economy,
the promotion of industrial activities, and the progressive opening of the global supply chain.
However, the war between Russia and Ukraine has sparked a significant humanitarian
catastrophe that is a shock to global growth and impacts millions of people. Global inflation has
been greatly impacted by the high cost of commodities on the international market, particularly
the price of crude oil, natural gas, and liquefied natural gas, which has climbed the most since
2011. International organisations' most recent projections for global growth in 2022 are all lower
than earlier projections (Thanh, 2022). What is the appropriate degree of inflation if both too
much and too little might result in unfavourable circumstances? It depends. Each nation will
have a different set of goals depending on its economic situation. Regarding the article Inflation

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Rate by Country 2021 (2021), the United States Federal Reserve maintains a long-standing target
for inflation of 2%, which it has is the rate that best achieves the principal objectives of the
policy, namely preserving consumer price stability and maximizing employment. The paper will
demonstrate and clarify many causes of inflation such as the value of the currency, the gap
between the rich and the poor and demand and supply of products and the effect of inflation.

Cause 1: The Value of the Currency

Collective supply and demand determine the value of a currency. Numerous variables, such as
interest rates, inflation, capital flows, and money supply, have an impact on supply and demand.
Currency is most frequently valued using exchange rates, such as Interest Rates, Inflation,
Capital Flow, and Money Supply. (How Is Currency Valued, 2021). Related to inflation, high
inflation raises the price of locally produced items and reduces the buying power of currency
owners. Higher inflation rates may cause a decline in the demand for a nation's currency, which
would lower the value of that currency. The decrease in the value of a country's currency relative
to other currencies usually refers to the term “inflation”. In the first meaning, it is acknowledged
that a currency's inflation has an impact on a country's economy, and in the second sense, it is
understood that a currency's inflation has an impact on the whole economy that uses that
currency. (Investopedia, 2019). 

In 2019, The gold content of one British Pound (GBP) is 2.1328 grams and that of the United
States Dollar (USD) is 0.7366, the exchange rate between GBP and USD is: 1 GBP = 2.8954
USD. By contrast, the real value of the euro and the dollar is already almost equal in 2022. This
is the first time in almost 20 years. (Wiseman, 2022). According to market analysis, the pressure
on the euro and pound reflects investors' unease about the economic outlook as the currencies are
vulnerable to soaring but unchecked inflation effective control. (Baran, 2022). 

About Government’s solutions, it can be understood simply as the policy of the central bank in
countries using a way of changing the discount rate of their banks to adjust the exchange rate in
the market. When the exchange rate rises to dangerously high levels, the central bank will raise
the discount rate, thereby raising interest rates in the market, resulting in short-term capital in the

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world market. run into their own country to earn high profits. The inflow of capital will
contribute to increased supply and at the same time ease the tension of foreign exchange demand,
so the exchange rate will tend to fall. (Lee, 1997). However, the discount policy also has a
certain and limited effect on issues related to exchange rates, because there is no causal
relationship between the exchange rate and the interest rate, the interest rate is not the single
factor determining the movement of capital between countries. A clear example is that In 1959,
the Bank of England used a discount policy to raise the discount rate from 4% to 6%, thereby
attracting short-term capital flowing into the country, contributing to solving the difficulties of
the balance of payments international maths in the UK. (Eichengreen et al., 1985). 

In terms of Business solutions, risk identification and exchange rate risk management strategies
to minimise negative impacts from exchange rate fluctuations are essential for every business.
Traditional methods and modern solutions today in the field of financial risk management can
eliminate most of the risk from currency exchange rate fluctuations, of course, it also affects the
efficiency of profit negatively. The following is an example and solution that businesses can
apply to cope with exchange rate fluctuations. A clear example is that a Canadian producer
exports to the United States and are expected to collect $5 million next year. If they have a
payment of $500,000 during the same period, this business is facing a risk of $4.5 million, if the
dollar depreciates and they don't have any USD reserves. To reduce this risk, businesses can
borrow $ 1 million and increase purchases from US suppliers by $ 1.5 million. In this case, the
enterprise only has to hedge against exchange rate risk for 2 million USD compared to 4.5
million USD before. In addition, businesses can also decide to invest in manufacturing in the US
to eliminate most of the risks. (Tucci, 2021). 

In conclusion, the increase in the price of goods and services on an ongoing basis is the
definition of inflation in general or interpreted as a whole the value of money decreases, the
higher the price increase, the lower the value of money. (Supriyatna et al., 2016). Thus, this
harms both the economy and the development of society a lot. 

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Cause 2: The Gap between the Rich and the Poor
The income gap between the rich nations and the poor nations is enlarged by inflation. Recent
studies also demonstrate the phenomenon known as "inflation inequality," which has been shown
to dramatically exacerbate the prevalence of poverty and income inequality. (Wimer & Jaravel,
n.d.). The reason why inflation exists is that the high inflation index showed there were serious
"bottlenecks" related to running the economy last year, particularly due to the COVID-19
pandemic. The two-decade period in which emerging economies' standards of living moved far
from those of rich countries is now over. The World Bank estimates that real income in 70% of
emerging and developing economies will grow more slowly than in advanced economies
between 2021-2023. (Đình Thư, 2022)

Additionally, real wages were the primary way that inflation had an impact on poverty.
Meanwhile, the labour market has fewer workers looking for work and the last two years of
weak investment resources will hamper economies' ability to improve productivity, which is a
key factor in promoting growth without causing inflation. According to ONS data, the poorest
households are already being hit the hardest by inflation. People with lower incomes frequently
don't have a lot of opportunities to bargain for higher pay. These people's salaries frequently
remain unchanged for some time after price increases. As a result, their purchasing power
declines and then income inequality expands as a result of inflation. (Reese, 2021). Moreover,
the population's poorest 10% experienced an inflation rate of 10.9 percent in April, which was 3
percentage points more than the inflation rate of the wealthiest 10% of income. (Karjalainen &
Levell, 2022). As a result, inflation is viewed as the "cruellest tax" on the poor.

When it comes to wealth discrepancies between the world regions, it seems that equities
outweigh income differences by a larger margin. Rich regions are substantially poorer than
poorer regions in terms of wealth: Sub-Saharan Africans, South and Southeast Asians, and Latin
Americans hold just 20 to 50 per cent of the world average (compared to 50 to 100 percent for
income).  However, the fact that poorer regions produce relatively less profit than richer people
for a given quantity of capital should be recognized. It is commonly claimed that the reason why

4
rich nations are successful is that they utilise their capital resources efficiently (widworld_admin,
2021). To be more specific, the "obsession" with inflation surrounds many countries. The figure
given by VietnamPlus (2022) shows that in May, inflation in the euro area increased by 8.1%,
four times the European Central Bank's 2% inflation target. In the US, inflation in the US grew
by 8.6% during the same period in 2016, reaching its highest level since 1981. Meanwhile, in
Asia, Thailand's inflation increased by 5.2%; Korea increased by 4.3%; Indonesia increased by
2.8%; Malaysia increased by 2.4%, equivalent to Vietnam; Japan and China both increased by
1.5%. Therefore, the rich nations experienced high inflation but also maintain their economy
effectively.

To reduce the gap between the poor and the rich due to inflation, the government can enact the
“inflation-adjusted payment approach.” By doing this, it may be possible to reduce the impact of
inflation on investment returns, enabling investors to recognize a security's real earning potential
independently of macroeconomic factors. Inflation-based salary adjustments are common among
companies. The quantity of money that individuals have increased their purchasing power, yet
these measures do not reduce inflation. (Reese, 2021).

Cause 3: Demand and Supply

The two most important sources of inflation are "demand-pull inflation" and "cost-push
inflation." High inflation also drives individuals with additional cash and the wealthy to use their
money to loot and stockpile commodities and properties, speculation occurs, and this state
further destabilizes the supply-demand relationship on the market, causing commodity prices to
soar. The prevalence of supply-related concerns enhances the probability of a period of poor
growth and high inflation. More than half of the current high level of 12-month inflation in
personal consumption expenditures is attributed to supply constraints (Shapiro, 2022).

When market demand for a certain product rises, that product's price will also rise. The prices of
other commodities increased proportionally, resulting in a price increase for the majority of
commodities on the market. The evidence indicates that, as a result of the current Covid-19
pandemic, fuel prices rose, leading to increases in taxi rates, fruit prices, and many other

5
products. Inflation is always the result of demand exceeding supply. According to Schwarzer
(2018), there is undeniable evidence that inflation can occur in the absence of what he refers to
as excess demand, which is driven by excessive pay claims by labour, business, or both.

Cost-push costs of businesses include labour, input material prices, machinery, worker insurance
costs, taxes, etc. When one or more of these variables increase in price, the entire cost of
production will rise. As a result, product prices will climb to preserve profits, and the overall
price level of the economy will likewise rise. According to Sabade (2014), a decrease in the
money supply does not guarantee a decrease in inflation. It may have unforeseen repercussions,
such as a recession.

Both demand and price inflation contribute to import inflation. In nations with open economies,
imported inflation (inflation from outside the nation) can rapidly develop. Inflation can be
transmitted by import and export price increases, as well as demand and cost inflation (Hidayat,
2022). Importing high-priced raw materials will have an impact on production and product costs,
ultimately increasing the price of domestic consumer goods. Additionally, the conflict between
Russia and Ukraine exacerbates supply chain interruptions. Specifically, the price of gasoline has
a significant impact on the production costs of enterprises and consumers.

The government can limit the simultaneous impacts of cost-push to manage inflation. Maintain a
close eye on global price fluctuations and inflation, and provide early warnings of pricing and
inflation-affecting threats. To formulate appropriate policies, it is required to evaluate and
identify which items and materials are likely to be short-term temporarily or permanently.
Control the price of input materials and enhance the usage of domestic raw materials to replace
imported sources progressively.

The effect of inflation: Recession and Unemployment

There are different definitions of an economic recession and in this report, we would look up
some of those. According to the National Bureau of Economic Research (NBER), it defines that
a recession is a significant decline in economic activity that is widespread and lasts several
months (Nguyen, 2022). In contrast, the International Monetary Fund thinks that recession does

6
not have an obvious definition and people prefer to observe two facets, which are the level of
economic decline and extended time, to indicate whether there is an economic recession or not
(Nguyen, 2022). Likewise, Stein stated that eight economists can determine if the U.S recession
is raised. In this section, we will figure out whether the recession is incoming due to inflation. 

It is vital that to assess if we are in a recession or not, there are two crucial indicators to
evaluate: inflation and economic growth. As we saw from reality, in June 2022 inflation soared
to 9.1% which reached a peak of over 40 years and this is the reason why the price of lots of
commodities increased dramatically. Jeff Cox (2022) indicated that food indexes rose by 1%,
energy prices also rocketed by 7.5% and this was not the end. Moreover, the economic growth
did not have a better situation which David Gura (2022) announced:‘The U.S. economy shrank
in the last three months by 0.9%. This is the second consecutive quarter where the economy has
contracted. In the first quarter, GDP, or gross domestic product, decreased at an annual rate of
1.6%.’ Upon this obvious and undeniable evidence, we have to admit that the U.S Economy
endured an integration of declining growth and very high inflation (Moore, 2022). Furthermore,
inflation may lead to numerous other problems, layoffs, fewer jobs and higher interest rates are
rational of a recession (Winters, 2022). Therefore, lots of economists, firms, and banks have
forecasted a recession or mild recession that could occur in the time of the last year of 2022
because of inflation. 

The inflation not only makes a great contribution to the recession it also affects the workforce in
2022. First of all, we will have two definitions to look up to which is the great resignation and
unemployment. According to Phipps (2022), The ‘Great Resignation’ is a word that depicts the
tendency of the large voluntary disengagement of workers from their job responsibilities and this
term had begun before the covid-19 pandemic. Mounting inflation surge up an expense of the
living problems precipitated more pandemic and compounded either the conflict between
Ukraine and Russia are truly putting heavy burdens upon families throughout the U.S,
presumably forcing workers to seek positions enabling employees to remain stable financially in
situations of adversity (Carbonaro, 2022). Moreover, according to a survey from PWC, about
33% of employees think that they have not been paid worthily and demand a higher raise in their
wage and the figure for people who work in technology is 44% (Carbonaro, 2022). Liu (2022)

7
stated that most of the Great Resignation was fueled by lower-wage service employees across
industries including leisure and hospitality, hotels, food services, and retail. These employees
also had some of the strongest compensation gains of the recent year as firms upped pay and
incentive packages to satisfy the talent deficit. Therefore, inflation hurt the great resignation. 

Likewise, we would look at the unemployment rate. According to OECD (2022), unemployment
is the jobless are persons of working age who are without employment, are available for work,
and have made explicit actions to obtain work. The universal adoption of this criterion leads to
estimates of unemployment rates that are more globally comparable than estimates based on
national definitions of unemployment. This statistic is measured in the numbers of jobless
individuals as a percentage of the labor force and it is seasonally adjusted. Due to the latest data
from the OECD, the unemployment rate in the OECD fell to 5.0% in April 2022, from 5.1% in
March, and this was a straightforward positive trend for the OECD. Upon the statistical data,
unemployment in the U.S also had an optimistic signal that the figure for it had decreased to
3.5% in July 2022.

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 However, we could not sedate this data because generally, it happened in the low-profit
margin and productivity area. This is the reason why inflation remains at a high percentage
and the GDP is down.

Conclusion: 
In summary, the appearance of the phenomenon of inflation comes from recession, workforce
implications, currency value, rich-poor divide, and demand and supply of goods. Thus, these are
powerful precursors to prove that the government should take actions to minimise the likelihood
of these causes and pay more attention to economic changes as well as people's incomes. In other
words, the same policies that encourage a prolonged and fair labour market recovery also assist
future efforts to control inflation shortly.

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