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An inflationary surge is taking hold of the global economy. This inflationary surge or rising prices is creating economic distress, in some case even political crisis in countries around the world. Global food and fuel prices have been rising, threatening to reach record levels in the coming months. Dire predictions on the consequences of rising prices have been made by the International Monetary Fund (IMF), World Bank (WB) and World Trade Organisation (WTO) for 2023. Inflation is wreaking havoc in every country it touches, in particular in developing countries.
Supply chain disruptions caused by the Covid-19 pandemic had already pushed up prices. Now inflation is further exacerbated by the US led NATO war against Russia in Ukraine pushing global inflation to its highest level since 2008. Tougher US and EU sanctions on Russian energy supply have led to further higher oil and gas prices adding to the current inflationary pressures.
The US is now also threatening to impose a price cap on Russian energy exports. It is suggested that this US decision led the OPEC Plus decision to cut back oil production because they fear that the capping of oil prices might be on the way to be used on them as well notwithstanding the fear of a looming global recession. Now the whole world is going pay higher energy prices for the decision made by the US government.
The downward pressures on developed countries' currencies like the euro and the British pound, caused by the interest rate hikes by the US Federal Reserve further worsening the situation. The dollar appreciation is also impacting developing countries in many ways including creating debt distress for many of these countries.
Also, a combination of unfavourable weather pattern affected the global food supply. Record heat and drought as well as devastating floods in many countries during the northern summer this year contributed to reduced grain production. These are clearly the effects of climate change impacting on food grain supply.
To further compound the problem, the United States and the European Union are facing much lower than expected growth as inflation continues to climb. The US and the EU together account for 42 per cent of both global GDP and global trade in goods and services. The US and the EU economies together are the single most important driver of global economic growth and trade.
Strong economic rebound in Asia early this year is also faltering as China's economy is slowing down. China is the world's second-largest economy (18 per cent of global GDP) and if it continues to contract, increased global recession is likely.
The IMF's World Economic Outlook released on October 11, 2022 forecasts that global economic growth will slow down from 3.2 per cent this year to 2.7 per cent in 2023. The global deceleration will be broad-based.
Developing countries are also now faced with dealing with the rising inflation in the US. According to U.S. Labour Department data published on October 13, the annual inflation rate for the US is 8.2 per cent for the 12 months in September 2022 after rising to 8.3 per cent in August. The US Federal Reserve has raised interest rates three times already this year to rein in rising inflation.
But the current policy of monetary tightening by jacking up interests rates by central banks in the US and the EU and other developed countries is not so much about the reduction of inflation per se, but it is directed to induce a major recession to forestall wage demands to keep inflation expectation anchored.
One corollary of rising US interest rates force up the US dollar's value against the currencies of developing countries. As import prices for developing countries are set in the US dollar, an appreciating dollar causes import prices to go up thereby further worsening inflation in those importing countries while the opposite happens to the US. The overall import price index for the US fell by 1.2 per cent in September this year despite rising inflation in that month or months before.
The impact of currency depreciation is already being felt by the people in developing countries, especially the poor. The currencies of developing countries have already declined dramatically, leading to an escalation of food and fuel prices in the local currency. Higher import prices have been a major factor pushing inflation higher in developing countries. In fact, imports are increasingly becoming an important factor for developing countries for contributing to rising inflation in the near-term future.
Furthermore, to prevent a very sharp fall in their exchange rates and to try to prevent capital flowing out of their countries into the US, developing countries raise interest rates thus pushing their economies into recession. At the same time, a growing number of developing countries are on the verge of defaulting on their debts as debt serving costs soar as most of these debts are denominated in the US dollar.
European Central Bank Vice President Luis de Guindos said late last month at a conference that Eurozone economic growth had slumped and could soon wind down to zero. According to a new Bloomberg Economics model projection, a US recession is effectively certain in the next 12 months. This outlook is premised upon persistent inflation and increasingly tightening monetary policy adopted by the US Federal Reserve.
As the US and the EU slide into recession, demand for developing countries' exports will decline, putting further downward pressure on those economies, thus further exacerbating the existing unemployment and poverty.
Rapid rise in Inflation in countries around the world has created a serious cost of living crisis which could worsen not only the condition of the existing poor people but the middle income people as well pushing millions more into poverty, especially in developing countries. Increasing inflationary pressures remain the most immediate threat to the economic and social stability in these countries as real income falls. According to a report published in early July this year by the UN Development Programme (UNDP), rising food and fuel prices have resulted in 71 million people worldwide falling into poverty.
The 20-page UNDP report focused on addressing the cost of living crisis in developing countries. It estimated that 51.6 million more people fell into poverty in the first three months after the Ukraine war, living off US$1.90 a day or less. This pushed the total number globally at this threshold to 9 per cent of the world population. An additional 20 million people slipped into the poverty line of US$3.20 a day.
Another UN report also published early in July this year indicated that world hunger rose last year, with 2.3 billion people facing moderate or severe difficulty obtaining enough to eat and that was before the Ukraine war started in February this year.
Achim Steiner, the UNDP official said " This cost of living crisis is tipping millions of people into poverty and even starvation at breath-taking speed", further adding a warning that "With that, the threat of increased social unrest grows by the day".
The World Bank (WB) report published very early this month (October, 2022) on the growth of global poverty provided a very grim picture on the devastating impact the Covid-19 pandemic on hundreds of millions of people in the world's poorer countries, now being further aggravated by soaring prices.
Soaring food prices disproportionately hurt the poor in developing countries. This is especially true in regions where people spend a majority of their income on food and rely on a specific food product. Low- and middle-income households tend to be more vulnerable to high inflation than wealthier households. For lower income countries, supply disruptions and higher prices could cause increased hunger and food insecurity. In fact, supply chain disruptions could intensify inflation pressures.
Poorer households may actually experience higher rates of inflation than upper income households because of the divergence between the way the Consumer Price Index (CPI) measures inflation and the actual pattern of spending by various income groups. The lowest income households in developing countries spend about half of their income on food and for the highest income group the figure is about 20 per cent. Calculating the CPI for different income groups, therefore, will provide better information on inflation experienced by the poor.
The worldwide inflation and the resulting cost of living crisis is reflected in the reduction in living standard, even sometimes experiencing hunger in many developing countries. One needs to go beyond a technical explanation of inflation where inflation is explained simply in terms of a mismatch between demand and supply where demand exceeds supply and the equilibrium between the two is to restored by making cut backs in demand as supply is not increasing.
Governments are cutting back on public spending threatening a new era of austerity to reduce demand when the problem is clearly on the supply side. They are trying to solve a supply side problem with a demand side solution. Inflation is also causing reduced spending by middle to lower income people as their purchasing power is progressively eroded as inflation climbs up.
As John Maynard Keynes pointed out, it is much easier to cut real wages by high inflation than by directly reducing money wages. The economic condition of these people is further aggravated by many instances of governments pursuing the austerity agenda to keep their finances in shape and that is also negatively impacting on the real wage levels. With inflation nearly 40 year high, people are spending more of their income on essentials like food and fuel, leaving less for non-essential items. The current course of action by the US Federal Reserve to induce a recession is hurting the most vulnerable, especially in developing countries.
Because of its central role in the global financial system, the US Federal Reserve interest rate hikes are ripping through the world economy. The International Monetary Fund (IMF) has warned that at least a third of the countries will suffer an economic contraction over the next year. The World Bank and UNCTAD have said that the synchronised lifting of interest rates is inducing a global recession.
Most developing countries are now faced with rising inflation exceeding central bank targets and falling economic activity. Fiscal support for the most vulnerable household has become extremely urgent now.
World's poorest have faced close to three extraordinary years. It is estimated that an additional 71 million could be pushed into poverty according to the UNDP. A counterfactual estimate since the beginning of the pandemic put the figure between 75 and 95 million living in extreme poverty in 2022.
As an importer of cooking oil, intermediate goods, food, fuel, and raw materials for production, Bangladesh is seriously affected by global inflation with its impact on food and consumer price inflation. According to data published by the Bangladesh Bureau of Statistics, the inflation rate in Bangladesh reached 9.5 per cent in September relative to 7.48 per cent in July this year.
The cost of living crisis caused by rising inflation could worsen the situation of the existing poor in developing countries like Bangladesh. According to a Reuters survey conducted in 18 countries including Bangladesh reveals the extent of the cost of living crisis. In Bangladesh, an unemployed graduate living on US$32 a month told his story how he was coping with his life at a time when inflation hits an eight-year high; not a pretty picture despite his positive attitude towards life.
The financial distress caused by the cost of living crisis is further revealed in a survey published in a newspaper in Bangladesh. The WFP conducted a survey of Bangladesh households in August this year. The results indicate that 29 per cent of respondent households had to use their savings to buy daily necessities, and 10 per cent of them completely used up their savings for the same purpose. 64 per cent of the respondents had to borrow money and 44 per cent had to buy those daily necessities on credit.
Rising inflation is making people to struggle to make ends meet. But the situation is likely to get even worse in 2023. Faced with supply disruptions and rising inflation, Bangladesh is also tightening its monetary policy by raising interest rates to strengthen the currency against the US dollar, yet the Bangladesh taka has been depreciating making imports including food and fuel costlier.
The Bangladesh taka was devaluated steeply against the US dollar resulting in a significant deterioration in the current account balance during 2021-22 reaching US$18.69 billion rising from US$4.57 billion the previous year. The trend continued during the first two months the current financial year (2022-23) creating a downward pressure of foreign exchange reserves.
Meanwhile, in the face of deteriorating trade balance, the Bangladesh government has introduced measures to restrict imports and also actively intervened in the foreign exchange market by introducing multiple exchange rates such as special exchange rates for expatriates for remittances, imports and exports.
Many countries also seek balance of payment support from outside sources including the International Monetary Fund (IMF) to facilitate the adjustment process as Bangladesh has done recently.
According to the IMF Blog (October 14), "In Bangladesh, the war in Ukraine and high commodity prices has dampened a robust recovery from the pandemic. The authorities have pre-emptively requested an IMF-supported program that will bolster the external position, and access the IMF's new Resilience and Sustainability Trust to meet their large climate financing need, both of which will strengthen their ability to deal with future shocks".
So, given the economic reality, is it plausible that everyone feels they are being devastated by inflation? This may not be the case; inflation significantly reduces the income of poorer households relative to those of the richest. Also, in an environment of high profit business culture, rising inflation provides an opportunity for large firms in highly concentrated markets to undertake financial engineering combined with profit gouging as the instruments for rent seeking. In fact, these large firms use their market power often to generate income by creating scarcity rather than increasing supply.
Furthermore, the United Nations Conference on Trade and Development (UNCTAD) in a report issued earlier this month made it clear that there is rampant profit gouging by the food and energy giants and speculation by hedge funds and others in food, metals, energy and other basic commodities.