The Office of National Statistics estimates that year to date the prices of electricity and gas have spiked by 54% and 97.4% respectively; milk and butter are 42% and 28% more expensive than last year; hotel prices are 10% higher than last year, as millions of Britons struggle to make choices between heating and eating. With inflation rates at 10.5%- with such high rates last seen in the seventies- the UK economy is in the doldrums with millions affected; consumer and investor outlook is bleaker than during the troughs of the pandemic- a deep recession seems imminent, amid political paralysis in Westminster.
Inflation has battered the finances of scores of countries, tipping Sri Lanka, Lebanon and Ghana towards IMF bailouts and painful austerity measures. High prices of food and fuel spark widespread anger and disrupt the existing order, often irreversibly: in the late 2000s, protests fuelled by high prices toppled ten regimes in the Middle East, as the Arab Spring raged on. High inflation in the developed world in the 70s brought Ronald Reagan and Margaret Thatcher to power in the US and UK, respectively, both of whom altered the economic order indelibly. As a vociferous blame game goes on, some rest the blame squarely on Vladimir Putin for shutting off the gas taps to Europe; others lay the blame on China’s Xi Jinping for his ludicrous ‘zero covid’ policy. But where does this high inflation emanate from?
Inflation simply means an increase in the rate of prices; as goods and services become more expensive, people’s savings and incomes lose value, since they can purchase lesser quantities, adversely affecting standards of living.
The problems that besiege the economy begin with the covid-19 pandemic of 2020-21. As the global economy ground to a halt, hustling workers online, factories and businesses were forced to close or operate at a reduced capacity, thus impacting production. With borders closed and high shipping prices, exports took a hit, as complex supply chains were hobbled- especially due to China’s strict policies to contain the spread of the virus.
To help consumers and businesses cope with the rapacity of the virus, governments globally doled out generous stimulus packages- the Biden administration is accused of overheating the economy with its 1400$ stimulus checks to households; similar schemes were followed across Europe and in Britain. With money in hand, consumers flocked online to purchase goods; with a spike in demand and halted supply, prices started rising. The central banks- led by the Fed in the US- were slow to respond to these pulses.
But as the pandemic waned and offices and factories opened up, economic recovery was underway: growth rates looked optimistic, with rapidly falling unemployment. The rate of inflation was poised to be at 2.36% in 2023. Then entered Vladimir Putin.
On 24 February as Russian tanks rolled into Ukraine, the global economy was seriously disrupted. As a harsh sanctions regime was imposed on Mr Putin’s regime, oil and gas supplies to Europe were hit. With Europe promising to wean off Russian gas- which accounts for 40% of Europe’s consumption- and the Kremlin demanding payment in Roubles, the markets were rattled: gas prices trebled, and the situation seemed to get worse with winter looming. With high oil prices, gas stations experienced long queues and angry customers.
Fuel is an important factor of production, and as prices of fuel spike, it spills over to the prices of other goods, which, too, become more expensive. Fuel and electricity are ubiquitously used in every sector from industry to agriculture to powering homes and offices.
Secondly, with Ukraine and Russia locked into a serious war, food exports from both nations- collectively dubbed as the wheat basket- have ceased; despite a deal brokered by the UN, crop yields have dropped significantly, rattling the food markets. As shortages increased and prices worsened, scores of nations in Africa and Asia risk facing serious hunger and malnutrition. Also, with a rise in the prices of packaging and transport, the movement of food has become increasingly pricier.
To combat growing inflation, central banks have globally adopted tighter monetary policies with rising interest rates. The Fed of the United States has upped the interest rate to 3.25%. This is caused a flight of capital, as investors flock to the US for higher returns; this has increased the strength of the dollar dramatically.
With a stronger dollar, exports have become more expensive- a common gripe among foreign ministers of Asia and Africa. The IMF estimates that a 10% increase in the value of the dollar corresponds to a 1% increase in the rate of inflation. All in all, we face strong supply-side inflation, with expectations of inflation rising persistently.
With the global economic outlook looking bleak, a recession seems imminent- with its scale and length being hotly debated by economists and policymakers globally. As interest rates rise, firms cut down on investments- a driver of the economic engine; with high prices already, consumers cut spending and production and employment are affected. All of this exacerbates the risk of a recession. In an increasingly globalised world with interconnected supply chains and markets, the spread of a recession seems equally likely.
In troubling times like these, it is important for the government to step up, and not take rash decisions like the mini-budget: the chancellor and his Treasury, and the Bank of England have to toe the same line. Millions look to the government as they face tough decisions of heating or eating as a harsh winter looms. It is now predicted that inflation will start receding after 2023, but again, that is a prediction and people cannot wait! Consumers and businesses need help and they need it now!
Illustration by Sebastian Thebault for the Newstatesman
https://www.newstatesman.com/economy/2022/05/inflation-2022-five-ways-government-failed-shield-uk