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Why is inflation on a rise in so many countries?

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Akshata Kamath
Akshata KamathMar 28, 2022 | 17:58

Why is inflation on a rise in so many countries?

Just the way Apple is the best company that makes world class phones, Inflation rate is the most important factor in Global Economics. You have to know about it no matter where you stay and no matter what industry you are in and no matter what your age is. 

Just the way Apple releases its new versions of phones frequently, inflation rates across the world change frequently based on global news and events, and knowing them makes you a smarter human. 

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Here is a simple explanation of what inflation is and how it is affecting us in different parts of the world in 2022.  

Photo: Getty Images
Photo: Getty Images

WHAT IS INFLATION?

Say you have been going to the market regularly for a few months on your bike and you always buy fruits and groceries of your choice. 

You usually leave your home on a bike, fill a litre of petrol for Rs 80, go to the market, buy 1 kilo of apples for Rs 20 and return home. Total Rs 100 spent. 

A few months later, you repeat the same cycle of routine and the same 1 litre of petrol costs Rs 90, 1 kilo of apples cost Rs 30 and once you return home, you realise that the total amount spent is Rs 120. 

A few months later, the Rs 120 becomes Rs 130 and then Rs 140. Then for a few months, the price falls for some time and you end up spending Rs 130 again instead of Rs 140.  

This permanent rise in price from Rs 90 to Rs 130 is inflation, ie., a measure that indicates the overall increase in price or the increase in the cost of living in a country over a period of time (usually a year).

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Though it can be calculated for certain items like food or fuel individually, it is calculated in general terms. 

Remember 2020? When food prices rose through the roof and #SabMehengaSi was trending on Twitter?

WHY IS IT SO IMPORTANT?

Inflation levels decide how much a household spends, and saves. It also decides and influences how a family will achieve its financial goals since rising inflation eats into savings and frequency of consumption.

Unfortunately, quick rise in inflation levels do not match the rate of rise in income levels in most countries. So when inflation levels rise by 10%, one has to be lucky to receive an equal increment (or more) to keep up with the rising costs. 

When you get a 5% raise but remember inflation is 7.9% pic.twitter.com/lgGtd96xvq

It can also negatively impact investment returns for an investor. Why? Well, someone who has invested in a fixed security return will receive less benefit in a situation where the inflation cost is rising.   

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Controlling inflation is a seriously sought-after skill and a person/authority's inflation-regulating skill also has the power to decide if he/they will come to power in the elections. Politicians have been elected to power after they promised to bring down inflation levels and have eventually even lost power, after they could not do so.      

SO, WHY ARE INFLATION LEVELS RISING? 

Illustration: Seemon, DailyO
Illustration: Seemon, DailyO

Over the last two years, the pandemic has disrupted the supply chain mechanisms, factory production and logistics in multiple countries. All while the world was still reeling under reduced fuel supply and rising transport prices. The Russia-Ukraine War has only amplified the fuel and food problems by limiting supplies to the globe. These being the central issues, here is what is exactly affecting these countries:  

USA 

USA is seeing its highest rate of inflation in 40 years, with an inflation of 7.9% in February 2022 and 7.5% in January 2022.

Prices are rising sharply for a variety of goods and services because of two reasons:

  1. Strong demand
  2. Persistent shortage in supply

Strong demand is present due to many factors like: 

  1. Reduced spending on services in the past 2 years due to restricted supply from businesses gave rise to the concept of 'revenge spending', where people buy more than previous levels of expectation.
  2. Residents have received substantial money from the government over the past year on account of Covid-19 stimulus programs, which was expected to be spent. 
  3. This pent-up demand means factories and companies have to work more and either hire more folks or pay more via pay hikes to the existing staff. 
  4. Energy prices and gasoline prices have gone up as oil-and-gas production lags behind pent up consumer demand
  5. The revived demand has also led to US is seeing its highest rate of inflation in forty years, with inflation of 7.9% in February 2022. Prices are rising sharply for a variety of goods and services because of two reasons 1. Strong demand and 2. Persistent shortage in supply Strong demand comes from the fact that many linked to the pandemic 1. The US residents have received a lot of money from the government stimulus programs which is expected to be spent 2. Reduced spending on services due to restricted supply from businesses is giving rise to concepts of revenge spending – where people buy more than previous levels. 3. More demand means more work for business folks. Means the previous few workers in the labor market will ask for raises. 4. Federal Reserve has kept Interest rates low so that borrowing is cheaper, making big purchases more attractive and affordable. Fed is considering increasing these rates for the first time since 2018! 5. The revived demand has also led to supply-chain disruptions. Truck drivers, seaport slots and warehouse spaces are all in short supply, leading to costly delays and rising shipping rates for goods. 6. Energy prices, including gasoline, have gone up as oil-and-gas production lags behind a return of consumer demand coming out of the pandemic 7. Russia Ukraine war is driving up the cost of staples like food and gasoline. This is affecting consumer spending as Americans are left with less discretionary income. This can lead to a risk in economic growth as supply-chain disruptions. Truck drivers, seaport slots and warehouse spaces are all in short supply, leading to costly delays and rising shipping rates for goods.
  6. Federal Reserve has kept interest rates low to make borrowing money cheaper and making big purchases affordable. But now, even the Fed Reserve is considering increasing these rates for the first time since 2018!
  7. Russia-Ukraine War is driving up the cost of staples like food and gasoline as supplies go down and sanctions rise.

This affects consumer spending as Americans are left with less discretionary income, which in turn risks the growth in the US economy.

UK / ENGLAND

As per the Office for National Statistics, the Consumer Price Index (CPI) rose at an annual rate of 5.5% in January 22, 6.2% in February 2022, and this has been the highest rise since 1992. 

In February, the rise in prices came on account of rise in prices for clothing, transportation, furniture and household goods. Even the food inflation was recorded at 5.1%. This was supplemented by soaring global prices for energy and petrol, which the UK direly needs to support heating, fuel and electricity in homes.   

Photo: Getty Images
Rising fuel prices affect cost of goods. Photo: Getty Images

The Bank of England expects the CPI to rise more than 8% by June 2022 and even reach double digits by Dec 22 if prices surged to the Russia Ukraine war.

THE SPRING STATEMENT 

UK's economic misery is expected to continue, thanks to UK's Finance Minister Rishi Sunak's recent Spring statement. Rishi Sunak, from whom UK expected a relief, especially for UK's poorest, has received unflattering reviews for his recent monetary policy. The policy seems to have made life even miserable for the inflation-affected residents.  

Rishi Sunak's Spring statement has shown that the government intends to protect the UK Treasury from the rising prices and allow inflation to ravage the finances of low and middle-income households. UK's funds are being held back to fund the tax cuts during the next election instead of being used to help 1.3 million people who risk being pushed below the poverty line next year due to inflation. 

Sunak has offered some support through lower fuel duty, raising the national insurance contributions threshold and money off council tax bills. But that does not do enough to compensate for the severity of the squeeze that the people need. 

UK's inflation rise is also due to: 

  1. Rise in regulated rail fares by up to 3.8% in England and Wales (the highest fare rise in 9 years)
  2. Rise in average gas and electricity bills by £693 a year from April 2022, which could again go up in October 2022
  3. Rise in payment towards National Insurance contributions from April 2022, which will be felt by companies, workers and the self-employed folk under the Health and Social Care Levy
  4. Rising bank interest rates which is expected to make mortgage payments higher
  5. Rise in TV and broadband prices 

AUSTRALIA 

The Australian consumer prices are rising at 3.5% annually and are expected to increase due to factors like: 

Photo: Getty Images
Australian Floods. Photo: Getty Images

  1. Natural disasters and extreme weathers (like the Australian floods) has hampered the supply chain and caused an extreme rise in food prices. 
  2. Australia's border closure also disrupted production and transportation logistics as they also dealt with isolation requirements and periodic interuption of factories and ports due to China's Zero Covid policy. 
  3. Tensions between China and the West and now Russia, have impacted trade associations and investment flows. 
  4. Energy transitions to renewable sources have not been the smoothest, which has also led to a 5-time increase in oil prices. 
  5. In 2021, Australia unexpectedly witnessed a phase of record low interest rates on home loans. Like it had never been this low ever. This led a lot of residents to opt for easy and affordable home loans. But many residents even overstretched themselves for this situation that seemed like 'once in a lifetime'. But the banks have raised interest rates to about 4-5% and this has severely impacted household savings.  

Photo: Getty Images
Fuel prices continue to shoot through the roof. Photo: Getty Images

SRI LANKA 

Sri Lanka has seen real bad times in 2022 thanks to their poor utilisation of forex reserves, rising cost of payment for imports, and lack of foreign cash inflows. Their poor management and slow action to ask for help has seen the beautiful country's economy to be plagued by 15.1% inflation in February 22 with food inflation rising to 25.7%. They specially fall in the vulnerable category as they mostly depend on imports for their essential items and recently there were news of people dropping dead as they waited in long queues for fuel. 

Photo : Reuters
Photo : Reuters 

PAKISTAN

Pakistan has grappled with extreme inflation, and saw the Consumer Price Index (the inflation measure) rising to 13% in January 2022 and 15.1% in February 2022. Pakistan has been suffering through record high inflation during the pandemic itself (and even before it).

When it could not reel through the Covid crisis, it ended up borrowing money from the IMF. Pakistan already has a high amount of borrowings which it has to service by high interest payments in foreign currency.

Also, there have been news of rampant black market trading in Pakistan where prices of essential items have been artifically increased. News of sugar and wheat mafia were making the rounds and so were the updates on illegal procurement of LNG, which added to the woes of residents.  

This so-called middle-class poverty has been squeezing the average wage earner and deteriorating standards of living, which is now leading to residents to call for the Prime Minister Imran Khan to quit.

AND RUSSIA, OF COURSE

Russians are feeling the cost of the war, thanks to the number of sanctions that have been levied on the country and the number of brands that have walked out of the country because of its invasion of Ukraine. Annual inflation rate as of March 18 was recorded to be 15%. 

As the currency fell to an all-time low, international supplies reduced and the demand for goods increased on expectations that the future prices will rise, the prices for goods rose even further. Russia even raised its bank interest rate from 9.5% to a whopping 20%.

Though the situation in Russia (and across the world) seems to worsen day by day, only time and cooperative action will tell how the governments will stop this cascading effect. And that's all for now, folks.

Last updated: June 02, 2023 | 17:36
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