Inflation is on the increase around the world, with food and energy prices hitting record highs. The rise has been driven in large part by pent-up consumer demand after the pandemic and the Russian invasion of Ukraine. As usual, the question to all is when it can expect to ease.
April saw a CPI (consumer price index) very high across the world. Driven by food and energy costs in the wake of the Covid-19 pandemic, inflation has been exacerbated by the Russian invasion of Ukraine.
The monthly food price index from the UN’s Food and Agriculture Organization (FAO), which tracks prices of globally-traded food commodities, reported an increase of 12.6 percent between February and March to reach the highest level since its inception in 1990.
The FAO’s cereal price index rose by an even greater amount of 17.9 percent over the period, reflecting a surge in global prices of wheat and coarse grains, largely due to export disruptions from Ukraine, one of the world’s largest wheat exporters. Putin’s invasion of Ukraine has also caused oil prices – that were already high due to pent-up consumer demand post-Covid – to soar over $110 a barrel, as many Western countries imposed crippling sanctions on Russia in retaliation.
Why today’s inflation?
The current spike in inflation may describe as “historical”, and it predicts that it won’t last at these levels for much longer. It has been provoked by the extraordinary demand for goods in 2021 as countries emerged from lockdowns, shops opened and people were able to go out and buy stuff with money saved during weeks of economic inactivity. It’s not just that we are seeing prices go up because supply today is constrained. Prices are also going up over concerns the war disrupting future supply.
The situation of demand-supply:
It has got an extraordinary surge in demand for goods and that has pushed off inflation because we also see an extraordinary surge in supply of goods. But the demand for goods was so unusual it overwhelmed the supply and when demand is greater than supply, we either get shortages or we get price increases. What it had was a mixture of both, but some of that surge in demand pushed up prices. Now, that started to weaken because, of course, by the end of last year in a number of countries, consumers’ stock of savings had disappeared so the demand was coming down. It still got some of that inflation pressure there but it’s on its way out.
If we look, for example, masks and other Covid prevention items in Bangladesh or elsewhere were rising last year and are now falling. They’ve now actually got negative inflation. So, we’ve started to see a correction, but there’s still enough of its lingering effects that add to inflation.
War and consequence:
The demand-driven inflation was starting to fade until the war in Ukraine inflicted economic destruction. There are all sorts of humanitarian consequences of the war, which are very tragic, but there’s also an economic consequence and that is that although Russia is not actually that significant as an economy, it’s significant in commodities.
This has led to higher commodity prices, partly because there have been constraints on supply either because the planting season for crops in Ukraine has been limited or because companies are less willing to purchase Russian oil, for example, but also because there’s a risk. It is not just that we are seeing prices go up because supply today is constrained. Prices are also going up over concerns the war will disrupt future supply. The result of this increase in commodity prices has suckled through to inflation.
Oil prices and consequences:
The price of a barrel of crude oil has consequences for things like food, airfares, petrol etc. because all of these are reliant on fuel. We do not pour a barrel of crude oil into the tank of our car. But we do pay for food, for petrol, airfares and so on, which are reliant on fuel. These are commodities, plus an awful lot of labour, and in the case of food, an extraordinary amount of labour. Most of what we spend is going on labour, which is delivering and processing, retailing and advertising. All of that comes out of what we spend on our loaf of bread; the farmer doesn’t actually get that much. Worldwide, if we look at oil prices, crude oil is just under 2.5 percent of a typical inflation basket. And then you’ve got a lot of labour turning that crude oil into gasoline. However, if the crude oil price goes up by 100 percent, that will add just under 2.5 percent to your headline inflation rate. And that’s pretty much what’s going on at the moment.
When is the Inflation deems peak?
So far it will be later still. It may expect the direction of inflation in the second half of this year, may go downwards. There are causes while it may deem that inflation is peaked i.e., while demand will fade, base effects-at a point the price change is obviously going to be less dramatic and it will lower the year-on-year inflation rate, Supply chain bottlenecks, shift in demand toward goods and away from services, aggregate stimulus and post-pandemic recovery, wage cost to price spiral- we’re not seeing wage costs as opposed to wages per se really rise in an inflationary manner at the moment. In most economies, people are working harder. That will not be inflationary.
Hoping that policymakers will have to entertain both possibilities, transitory and more persistent inflation. Blaming and claiming cannot develop the situation. Rather it should move with constructive moves and possibilities.
How inflation may be fixed?
The best thing governments can do is nothing. In as much as governments really can’t change the oil price, central bankers can’t suddenly change the price of wheat and other commodities. Part of the pricing inflation story will naturally be coming down, and other factors like the impact of the Ukraine war on food and fuel prices are beyond the scope of influence from most governments.
However, it is a different question when it comes to whether governments should try and mitigate the consequences of higher inflation. There are things they can do. They can either look at benefits that are being paid to try and help people for higher prices, or where something is being taxed. Oil, for example, is often taxed, so some governments may feel they could temporarily lower the tax on it, or reduce sales taxes on other products to try and make life a little bit more affordable. So there are things that governments can do to mitigate the impact on the cost of living in the short term, even if they can’t change oil supply and demand. If we’re talking over the next 10 years, then yes, of course, governments can encourage investment in renewable energy and so on. But in the short term, there is a limit to what governments can do to offset price increases.
Dialogue of stagflation, this seems misguided:
Inflation is likely to remain elevated into the middle of next year before base effects and new supply capacity takes effect. Demand is also expected to become more balanced, with consumption shifting towards services as mobility restrictions are eased further, taking pressure off manufactured goods. Worker participation in the labour force should also rise as many social programs end and savings are reduced. Though there has been increasing talk of stagflation, this seems misguided. Global growth is significantly above trend and is expected to remain robust for a number of years, helped in part by longer-duration fiscal spending on infrastructure.
The risk is that inflation becomes self-fulfilling:
The longer it remains elevated, the greater the risk that companies will be encouraged to increase prices further, and workers seek higher wages. The profit motive will keep companies focused on cost control and productivity enhancements as capital for labour substitution and an accelerating pace of digitization ultimately curb the pace of wage growth. The shift to decarburization may well create pockets of price pressures further out, but will also demand improved efficiency. After the reopening of economies, increasing pressure on service industries that have been experiencing weak demand for discretionary medical care and food away from home is likely to increase, adding new sources of upward pressure on the price level. This pressure will be strong enough to force central banks to raise policy rates sooner than currently discounted in financial markets. What is clear is that central banks have their inflation-fighting credentials, which is critical to both the short- and longer-term outlook.
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I was really interested to know about inflation