Globally, people are facing inflation at a level not seen in decades as the prices of essential goods such as food, heating, transport and housing rise. And although a peak may be in sight, the effects could be worse yet.
How did we get here? In two words: pandemic and war.
A long and comfortable period of low inflation and low interest rates came to an abrupt end after the arrival of COVID-19, as governments and central banks kept locked-down businesses and households afloat with trillions of dollars in aid.
This lifeline prevented workers from joining queues, businesses from collapsing and housing prices from collapsing. But it also reduced supply and demand like never before.
By 2021, as the lockdown ended and the global economy grew at its fastest pace since the recession in 80 years, all that stimulus money overwhelmed the world’s trading system.
Factories that were idle couldn’t operate fast enough to meet demand, COVID-19 protection laws created labor shortages in retail, transportation and health care, and the recovery boom pushed up energy prices. What did
If that wasn’t enough, Russia invaded Ukraine in February and Western sanctions on the major oil and gas exporter sent fuel prices even higher.
Why it matters
Known as a “tax on the poor” because it hits low-income earners the hardest, double-digit inflation has exacerbated inequality around the world. While wealthy consumers can rely on savings accumulated during pandemic lockdowns, others struggle to make ends meet and a growing number rely on food banks.
With winter setting in in the Northern Hemisphere, the pressure on living costs will intensify as fuel bills rise. Workers have gone on strike in sectors ranging from health care to aviation to demand that wages be kept in line with inflation. In most cases, they have to settle for less.
Concerns about the cost of living dominate the politics of rich countries – in some cases over other priorities, such as climate change action.
While the recent drop in gasoline prices has 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 Schulz are expanding their budgets to include billions of euros in aid programs.
But if things are tough in industrialized economies, rising food prices are exacerbating poverty and suffering in poor countries, from Haiti to Sudan and Lebanon to Sri Lanka.
The World Food Program estimates that an additional 70 million people around the world have come close to starvation since the start of the Ukraine war, in what it calls a “hunger tsunami.”
What does this mean for 2023?
Central banks around the world have raised interest rates sharply to cool demand and control inflation. By the end of 2023, the International Monetary Fund expects global inflation to fall to 4.7 percent — just under half its current level.
The goal is a “soft landing” in which the cooling off occurs without housing market crashes, business bankruptcies or rising unemployment. But such a best-case scenario has proved elusive with high inflation in the past.
From US Federal Reserve chief Jerome Powell to the European Central Bank’s Christine Lagarde, there is growing talk that the medicine for rate hikes may taste bitter. On top of that, risks around major uncertainties – the war in Ukraine, tensions between China and the West – are skewed to the downside.
The IMF’s October regular outlook was the bleakest for years, saying: “In short, the worst is yet to come and for many, 2023 will feel like a recession. “
