In Turkey, scenes of people waiting in long lines just to buy bread and gasoline have become commonplace. In the United States (US), food and fuel prices have dramatically shot up. Likewise, Brazil’s middle class and poor families are reeling from rising prices amid the protracted COVID-19 crisis. In fact, rising inflation levels are a global phenomenon and are affecting both developed and developing countries.
While the reasons for this bout of inflation vary based on the economic systems of the different countries, experts largely concur that this is a result of the disruptions caused by the pandemic. Coupled with years of economic mismanagement in certain countries, this has spelled disaster in several parts of the world, where inflation is now reaching record highs.
But before getting into the specifics, it is necessary to understand what exactly inflation means and what its generally accepted warning signs are.
What is inflation?
Inflation is a sustained rise in the general level of prices in an economy. The word ‘sustained’ is of particular importance, as inflation does not occur when the prices of one or two goods have gone up; the phenomenon arises only when there is an increase in the prices of most goods and the rise is persistent.
Broadly speaking, inflation is the result of an increase in the demand for goods and services while the level of production stays the same or decreases. Simply put, there is “too much money chasing too few goods.”
What role has the pandemic played in increasing inflationary pressures?
According to the World Bank, the onset of the coronavirus and the resultant lockdowns imposed by governments to contain its spread “represents the largest economic shock the world has experienced in decades” and has brought economic activity to a “near stand-still.”
One of the impacts of COVID-19 has been major supply chain disruptions, which have added costs at every stage of production, ultimately leading to higher prices across the board. For instance, a supply shortage of semiconductors has led to major auto-makers slashing production and as result driving up vehicle prices.
Additionally, producers have not been able to keep up with rising consumer demand as more countries open their economies following a sustained period of economic slowdown. This has been true in the case of the highly volatile energy sector. The rising demand for energy, especially from factories and service providers, and the inability of oil producers to rapidly increase production, has resulted in sharp price increases.
These pandemic-related disruptions have been spread out across the globe and the resultant inflationary pressures have affected countries including the UK, Canada, Germany, Russia, Sri Lanka, Hungary, Belarus, Iran, Argentina, and Mexico
Are government policies fuelling current inflation levels?
Adding extra money into the economy has always been a touchy subject, but the generally accepted view is that when money is injected into an economy through government spending/stimulus programmes, it leads to a rise in prices. This is a major reason why inflation levels in many countries are at their highest level in decades.
For instance, in Brazil, President Jair Bolsonaro’s massive spending programme aimed at curbing poverty has been blamed by critics for indulging in fiscal incontinence and risking the fiscal health of the country. They have also blamed Bolsonaro’s $16 billion spending programme as one of the major reasons why inflation has soared to 10.7% and noted that rising prices of food and fuel have hit the poor the hardest and widened inequality. Even Bolsonaro’s close associates are calling on him to spend more responsibly.
Similarly, in the US, President Joe Biden’s $1.9 trillion Covid relief plan, including stimulus checks, has been the subject of intense criticism. The main contention is that the money being poured into the economy is worsening inflation, which is now at a 40-year high of 6.8%. According to reports, the US Federal Reserve is under great pressure to “rein in its pandemic stimulus programme” to deal with the rising price levels.
Former Treasury Secretary Larry Summers has said that US spending policies have led to “excessive inflation caused by overheating of the economy.” He notes that the policies will “entrench” inflation above the target rate of 2% and ongoing inflationary pressures are not “transitory” and will not go away on their own accord.
While the Brazilian spending programme has been widely popular and Washington’s stimulus checks have been praised for helping millions affected by the pandemic, critics have said that excessive spending could have negative effects on the economy in the long term by eroding the purchasing power of consumers, widening the fiscal deficit, and increasing the national debt.
In the case of Turkey, President Recep Tayyip Erdoğan’s unorthodox policy of cutting interest rates when prices are high goes against conventional economic wisdom. Central banks normally raise interest rates when there is a rise in inflation, thereby encouraging consumers to spend less and save more, ultimately reducing the circulation of money. Erdoğan’s rates cuts have thus been blamed for Turkey’s economic woes, which include inflation rising above 20% and the rapid depreciation of the Lira.
In the most extreme scenario, such policies can drive a country to ruin, as in the case of Lebanon. A combination of factors, including excessive government spending, corruption, and social tensions have devastated Lebanon’s economy. The massive Beirut port blast that ripped the city apart in 2020 has only added to Lebanon’s woes, leading to hyperinflation and a currency in freefall.
What are the political consequences of continued inflation?
Inflation has always been a politically sensitive topic and public opinion of governments and leaders are not always positive when inflation levels are high. In fact, the rise in prices of goods and services inevitably leads to popular pressure on governments and can often be the deciding factor in election results.
In the case of the US, the UK, Brazil, and Turkey, the latest public opinion polls do not bode well for their governments. According to a recent CNN poll, 63% of Americans say that their economy is in a “poor state” and 54% disapprove of how President Biden is handling the economy. Similarly, in Turkey, the opposition has been gaining ground at the expense of declining support for Erdoğan. Likewise, rising prices have made the ruling British Conservative Party unpopular; they even lost a by-election last week in a seat they had held for 200 years. Among a host of other contributing factors, inflation has also managed to claw away support from Brazilian President Bolsonaro.
Will inflation levels recede in the near future?
Predicting the inflation outlook for the future is not an easy task. Experts have projected that inflation levels will stabilise in most countries once economies start recovering from the pandemic. However, the spread of Omicron, the latest COVID-19 variant, has left central bank officials across the world worrying that inflation will not recede anytime soon.
According to a recent survey conducted by McKinsey, a majority of respondents see inflation as a “pressing economic threat” that is likely to remain in the foreseeable future. Against this backdrop, it is important that governments and central banks follow prudent fiscal and monetary policies, including limiting government spending and hiking interest rates when necessary to keep a lid on inflation from boiling over.
What’s Behind the Global Surge in Inflation Levels?
The COVID-19 pandemic and government policies have dramatically raised inflation levels in many countries.
December 22, 2021
People walk past a currency exchange shop in Istanbul, Turkey, 2020. IMAGE SOURCE: GETTY IMAGES