‘The worst is yet to come’: the curse of high inflation
Mark John for Reuters
Sat 10 Dec 2022 18:11 Last update on: Sat 10 Dec 2022 18:15
Signs with prices of various fruits and vegetables are seen in the Paloquemao market square, amid inflation that has reached the highest figures in years, in Bogota, Colombia. Photo: Reuters/File
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Signs with prices of various fruits and vegetables are seen in the Paloquemao market square, amid inflation that has reached the highest figures in years, in Bogota, Colombia. Photo: Reuters/File
Globally, people are experiencing inflation at levels not seen for decades, as prices for essentials such as food, heating, transport and accommodation rise. And while a peak may be in sight, the consequences could get even worse.
How did we get here? In two words: pandemic and war.
For all the latest news, follow The Daily Star’s Google News channel.A long and comfortable period of low inflation and low interest rates ended abruptly after COVID-19 struck, as governments and central banks kept shuttered businesses and households afloat with trillions of dollars in support.
That bailout kept workers from joining queues, businesses from going broke and house prices from crashing. But it also drove supply and demand out of pocket like never before.
By 2021, when austerity ended and the global economy grew at the fastest post-recession rate in 80 years, all that stimulus money overwhelmed the world’s trading system.
Idle factories couldn’t rise fast enough to meet demand, COVID-19 safety rules caused labor shortages in retail, transportation and health care, and the recovery boom caused energy prices to soar.
If that wasn’t enough, Russia invaded Ukraine in February and Western sanctions against the major oil and gas exporter sent fuel prices even higher.
Known as a “tax on the poor” because it hits those with low incomes the hardest, double-digit inflation has exacerbated inequalities worldwide. While wealthier consumers can rely on savings built up during pandemic lockdowns, others are struggling to make ends meet and a growing number are relying on food banks.
With winter setting in across the northern hemisphere, that pressure on the cost of living will become increasingly severe as fuel bills soar.
Workers have taken strike action in sectors from health care to aviation to demand that wages keep pace with inflation.
In most cases, they have to settle for less.
Concerns about the cost of living dominate the politics of rich nations – in some cases overriding other priorities, such as climate change action.
While recent drops in gasoline prices have eased some of the pressure, inflation remains a top focus for US President Joe Biden’s administration. France’s Emmanuel Macron and Germany’s Olaf Scholz are stretching their budgets to channel billions of euros into support programs.
But if things are tough in industrialized economies, rising food prices are exacerbating poverty and suffering in poorer countries, from Haiti to Sudan and Lebanon to Sri Lanka.
The World Food Program estimates that an extra 70 million people worldwide have been pushed closer to starvation since the start of the Ukraine war in what it calls a “tsunami of hunger”.
The world’s central banks have started raising interest rates sharply to cool demand and tame inflation. By the end of 2023, the International Monetary Fund expects global inflation to have fallen to 4.7% – just under half of its current level.
The goal is for a “soft landing” in which the cooling occurs without housing market crashes, business bankruptcies or rising unemployment. But such a best-case scenario has proved elusive in previous encounters with high inflation.
From US Federal Reserve Chairman Jerome Powell to Christine Lagarde of the European Central Bank, there is increasing talk that the medicine for interest rate hikes may taste bitter. Moreover, risks surrounding the major uncertainties – the Ukraine war, tensions between China and the West – are to the downside.
The IMF’s regular October outlook was one of the bleakest for years, saying: “In short, the worst is yet to come and for many people, 2023 will feel like a recession.”
