A Simplified Understanding Of Local and Global Inflation Today - Mulenga Chanda

The economics of today will highlight key phrases and key frameworks that may be difficult for ordinary people to understand sometimes. In society, you will find people; young and old alike trying to understand why commodity prices are constantly increasing even when inflation is low in some countries, why wages are not increasing, why there’s more doom and gloom in today's news than there is hope and light.

In this article, I help with narrowing down an understanding of what inflation looks like in Africa, America, Europe and Asia today, with efforts to shed light on a few key changes we must all pay attention to going forward.

Throughout the course of history, society has always given a side eye towards politicians, economists and analysts – and rightly so, because a lot of them don’t know how to help a layperson understand what's going on locally and globally regardless of background, country of origin, race and gender.

What is Inflation?

Simply put; Price increase, or as defined inflation. It can be thought of as the gradual loss of purchasing power. It is the average price increase of a selection of products and services over time, which can serve as a proxy for the rate at which buying power declines. A unit of a currency effectively buys less as a result of the increase in pricing, which is sometimes stated as a percentage. Deflation is what happens when prices fall and buying power rises, basically a close opposite.

Others simply define inflation as, “too much money chasing too few goods” or as in deflation; “less money chasing a lot of goods”. Better right?

You can also try creating your own lingo so that you don't forget in the future.

Further meaning;

It implies that the quantity of money that commercial banks have available to lend out increases when the central bank implements an expansionary monetary policy, such as lowering the reserve requirement. The amount of money that commercial banks generate will therefore rise. More loans will be issued by the banks, which will boost the amount of money in the economy. More money in circulation will cause real GDP demand to exceed real GDP supply, which will result in inflation.

What causes it;

Demand Pull Inflation

Inflation driven by demand is one factor. When this happens, there is a rise in demand for products and services but not a substantial rise in supply. Businesses can't scale up production quickly enough to meet demand in the short run. Prices increase as a result.

Cost Pull Inflation

Price increases are caused by both an increase in production costs for firms and a rise in demand. For instance, rising expenses for labor or raw materials may compel businesses to increase the price of the products and services they offer. A general price increase and higher inflation rates may result in businesses being impacted, thus increasing their prices along the way.

Devaluation

When a currency loses value in relation to other currencies, devaluation has taken place. As a result, imports become more expensive and inflation increase. If the value of the dollar falls versus the euro, more dollars are needed to buy the same number of euros. A company may need to increase the pricing of imported items from Europe to cover the higher cost.

Wages

The wage argument continues to split opinion. In the extent to which increasing salaries impact inflation, there are several divergent opinions. Even though higher salaries may seem like a good thing for workers, some economists worry that there could be negative effects, especially if the minimum wage is increased. Employees may have more money to spend on goods and services if they earn more money. Businesses may decide to increase their pricing to offset rising production and labor costs as a result of increased demand. Some specialists however, disagree. According to them, previous minimum wage increases have not kept pace with inflation increase. Employers may hire fewer people, or productivity levels may be higher, which would reduce inflation rates. There are different causes of inflation and many of them are subject to opinion but these are the few first beginner causes that can help in understanding it better.

That said, there are different types of inflation and many economists and analysts alike have several publications about this. However, the goal of this article is to marry both the understanding of this phenomenon that is inflation with what is currently happening in our current affairs at both a local and global stage.

Breaking it down,

Lately, we have seen both local and global headlines talking about inflation, just last week; the European Central Bank prioritized the fight against inflation even though the bloc's economy is expected to enter a winter recession by increasing its benchmark interest rates by an unprecedented 75 basis points and signaling additional increases. That said, aggressive rate increases by central banks seems to be the norm lately when challenges arise in different economies. Consumer confidence is at an all-time low. Price levels for commodities are very high. It is obvious that inflation has, at the very least, changed the tone of the economies of the world and may have also changed the course of the global and national economies for years to come.

What's going on in Zambia?

July 2022 saw Zambia's annual inflation rate decreased from 9.9% to 9.8%, reflecting a minor decline in food costs (11.3% vs. 12% in June) and the ongoing strengthening of the local currency. In the meantime, prices for non-food items increased (7.8% vs. 7.2%). Consumer prices increased by 0.3% on a monthly basis after rising by 0.4% the previous month.

After bilateral creditors met on July 30 to offer the funding guarantees to Africa's first sovereign defaulter since the epidemic, it was no surprise that Zambia finally got the International Monetary Fund clearance for a $1.3 billion package. The kwacha has since appreciated 1.6% in July/August and continued to rise higher against the dollar, thus stabilizing the foreign exchange rate for now.

And as you would have it, analysts and economists alike are predicting the inflation rate to increase sooner rather than later unless something drastic changes before the end of 2022. It is also understood that even though Zambia received the IMF bailout, a lot of prices will still increase in the future as a measure of keeping the Zambian economy thriving and stable, adhering to the agreement Zambia has with the International Monetary Fund (IMF).

Therefore, it would be immature for Zambian’s to assume life will be without challenges in the next few months or perhaps years. This is the price that we had to be pay as a consequence of certain decisions made at the top of the food chain in the previous years.

But why are prices still high if the so called inflation is slowing down or as in this case, slowed down recently?

Well, Simply put - the present rate of inflation simply means that commodity prices will continue to rise, albeit more slowly—at a pace of 9.7% as of June/July — than they did last year, when they increased at a faster rate of 24.4%.

When inflation is low in this case, prices will and can be rising, but at a more desired rate/pace. This does not by any means suggest that when inflation is low then prices can decrease overnight. There are many frameworks and systems that play different functions to achieve a biblical miracle that most people desire in today's financial world. There is no microwave solution to inflation.

The steady exchange rate, the lower price of corn since the nation has a glut of supplies (abundance), the appreciation of the kwacha, and the abundance of vegetables on the market are all to blame for the present inflation rate. Despite a global trend of record consumer price growth, Zambia's inflation rate fell below 10% in June for the first time in over three years. Prices increased 9.7% compared to a year earlier, down from May's 10.2%% increase. Zambia's inflation rate last fell below 10% in August of this year. In June, annual food price rise decreased to 11.9% from 12.3% the month before, and non-food inflation decreased to 6.9% from 7.5%. 0.9% more was spent during the month. Bloomberg also reported that food-price growth fell to 11.3% in August from 12% in July.

The monetary policy committee may have flexibility to hold rates and support the recovery of the economy going forward and by the end of 2023, the central bank expects inflation to have fallen to its goal range of 6% to 8% from this year's average of 12.5%.

Good readings like these may be encouraging to the ordinary eye but more to follow now that the IMF bailout package was successful. Still early days and there is much work to do, especially because the understanding now is that there will be austerity measures to be carried out in the country - ranging from fuel subsidies being fully eliminated by the end of this month (September 2022) and revision of electricity tariffs eventually amongst other things.

Austerity measures refer to?economic policies implemented by governments to reduce government spending in order to reduce public debt and to shrink the budget deficit.

What else? The government also eliminated a 5% customs fee on the importation of cattle and chicken breeding in order to assist agriculture and livestock. Food price inflation decreased from 12% in July to 11.3% in August. Even if the mining industry contributes 10% of the nation's GDP, difficulties still exist.

Inflation in Africa:

After Covid - 19, we had another thing coming in the name of the war between Russia and Ukraine. These series of events called for so many unprecedented events that shook the globe at all levels; mostly socially and financially.

Food: Food costs are rising quickly, accounting for around 40% of consumer spending in the Africa. The supply of wheat in Africa is imported to a degree of about 85%. The cost of gasoline and fertilizer has an impact on domestic food production as well. Together, these elements will worsen food insecurity and afflict the poor disproportionately, especially in metropolitan areas.

Oil: The region's oil importers will pay an additional $19 billion in import expenditures as a result of higher oil prices, aggravating trade imbalances and driving up transportation and other consumer costs. Fragile states that buy oil will be severely hurt, with fiscal balances predicted to worsen by about 0.8 percent of GDP compared to the October 2021 prediction, which is twice as much as other oil-importing nations. However, eight petroleum exporters in Africa will be seen to gain from rising oil prices.

According to the IMF; the shock is anticipated to make the already difficult task of obtaining additional money through taxes, increasing expenditure on development, and loosening debt restrictions even more difficult. Fiscal authorities are often not well-prepared for further shocks in today's economic climate. Half of the low-income countries in the region are already experiencing hardship or are particularly vulnerable to it. Rising oil prices can directly affect countries' finances through fuel subsidies, making it unpopular to remove these subsidies owing to inflation. Spending pressures will only increase when economy slows, and rising interest rates in wealthy countries may make funding for some governments more expensive and challenging.

"Net commodity importers like Zambia, Benin, Ethiopia, and Malawi will have to find money through reallocating their budgets in order to fund the protection of the weak. Net exporters like Nigeria will probably profit from increased oil prices, but any fiscal gain will depend on how much fuel subsidies are allowed to continue. It is crucial that windfalls, supported by solid fiscal institutions like a credible medium-term fiscal framework and a strong public financial management system, are primarily used to increase policy buffers".

The challenge of global food security must be addressed by the international community. In a recent joint statement, the IMF, the World Bank, the World Food Program, and the World Commerce Organization called for, among other things, increased agricultural production, financial support, including grants, and unrestricted trade.

The Group of Twenty countries' pledge to re-direct $100 billion of their IMF Special Drawing Rights allocation to vulnerable nations if they follow through on it will significantly aid the region's long-term development and short-term financial need. There are ways to re-direct SDRs, such as through the Poverty Reduction and Growth Trust of the IMF or the recently established Resilience and Sustainability Trust, which has received pledges totaling approximately $40 billion as reported by the IMF.

Inflation at a Global scale:

Inflation has significantly outpaced forecasts in the last six months. Actual rates have doubled projections in many nations. European nations are especially impacted. For instance, Lithuania's yearly inflation rate is 15.5 percent, which is roughly five times more than predicted. Both Poland and the United Kingdom are much above expectations with rates of 11% and 9%, respectively. Switzerland stands out at 3 percent. Asia is experiencing a less drastic shift: South Korea is at 5%, and India's inflation is only slightly above predictions at roughly 7%. Inflation is still relatively low in China and Japan. Due to rising fuel and food prices, the inflation prediction for emerging Asia has been increased from 3.7% to 4.2% for 2022 and from 3.1% to 3.5% for 2023. However, compared to other parts of the world, the region experiences lower inflation pressures. In comparison to the U.S., where inflation peaked at 9%, Europe saw a high range between 8.5% and 9%, Asia's average inflation peaked at 5.5% in August and has already decreased by roughly half a percent from those high levels - it is evident that there is a growing global trend.

Mckinsey and Company explained that Investors frequently claim that commodities are the best asset class to invest in during inflationary periods. That is understandable given that the price of commodities reflects the demand for the raw resources required for economic growth.

Almost all of the goods in the graphic above follow the same pattern: as economic stimulation restored the world economy after the COVID-19 pandemic, prices skyrocketed. Then, once Russia invaded Ukraine, prices increased even further. Fertilizer prices saw the highest increase. Fertilizer costs increased significantly as a result of natural gas shortages—a crucial ingredient in the production of fertilizer—and rising farmer demand.

Prices for staple foods have significantly increased as a result of the rise in fertilizer costs as well as other effects of the conflict in Ukraine. Since the start of the index by the UN Food & Agriculture Office in 2021, food prices have grown to their highest level. Prices are significantly higher now than they were during the previous price increases in 2008 and 2011, which were brought on by the instability of the global financial crisis. Prices have significantly decreased over the past ten years. However, in 2021 they began to rise dramatically as a result of supply chain problems, a drought, and other factors. And food prices have reached a completely new high due to the conflict in Ukraine.

In the largest OECD economies, real wages have been stagnant for many years. Real earnings sharply increased just before the epidemic, and tighter labor markets provided workers the advantage in bargaining. Of course, the epidemic significantly changed the situation. Real wages started to gradually increase once more as economies stabilized and rebalanced. However, raging inflation restrained that expansion, growing so quickly as to reduce the purchasing power of average workers' take-home income. For instance, workers in the United Kingdom have suffered a real salary decline of almost 8% annually.

The worry is that when prices rise and show little sign of slowing down, inflation will become entrenched and central banks would need to raise rates more adamantly to limit demand. As a result, many economists are revising downward their predictions for economic growth. For instance, the OECD's Economic Outlook projects real GDP growth in Turkey and Argentina to be roughly eight percentage points lower than previously anticipated. The UK projections have been revised downward by 7.4 percentage points. Forecasts for Saudi Arabia's real GDP growth are currently roughly 6 percentage points higher due to the increasing demand for oil.

What's going on in the US?

The Consumer Price Index (CPI) for August is out today and in yesterday's trading session, US stocks increased. The Dow Jones increased by over 250 points, or 0.8%, while the S&P 500 increased by 1%. The Nasdaq Composite led the way higher this afternoon, rising 1.2%. As some foreign investors return, Russian stocks climb; the MOEX Russia index closed 1% higher at 2,450. Of course, this is a continuation of the session's 1.5% gain. Ordinary citizens are made to use most of their savings to keep up with their livelihoods and cost of living, mostly due to high prices. The argument on the issue is however rooted in the fact that oil and gas prices decreases but inflation is still at an all time high in 40 years. The Fed have vowed to continue raising rates to try and tame inflation.

Economic researchers anticipate that in August, the US consumer price index will have increased by 8.1% over the previous year, slowing from the 8.5% growth witnessed in July. Prices are anticipated to have decreased by 0.1% from July to August according to CPI, clearly as a result of the ongoing decline in energy prices. The annual inflation rate in the United States increased from 9.1% to 8.5% for the 12 months ending in July 2022, which is the highest level since November 1981. The Labor Department released data on August 10, following a swift and significant hike in interest rates to a range of 2.25 to 2.5% by the Federal Reserve, the inflation report was released in America detailing different opinions and fears of the coming age.

The data released gave the country's central bank encouragement that they are making progress, even though it won't prevent the Fed from raising rates further as is the norm in other continents like Europe for example.

"The slowdown in the consumer price index for the previous month is probably a major relief for the Federal Reserve," said Nancy Davis in July, 2022, founder of Quadratic Capital Management.

The Fed argued that "inflation was transitory, which was false”, the Fed must aggressively raise interest rates to reduce inflation without starting a U.S. recession, which is a delicate balancing act.

Rising interest rates make borrowing more expensive for households and businesses, which drags down economic growth. The U.S. labor market has been strong up to this point, but Wall Street worries that the economy will not be able to withstand rising interest rates as reflected in the S&P 500's 13.5% year-to-date fall. Because fund managers often use discounted cash flow models to calculate their price objectives for growth firms, growth equities are particularly sensitive to rising interest rates. Higher discounted rates are viewed as being less beneficial for future cash flows.

Contrarily, the US will have the sharpest decline in inflation among developed nations, in part because of the dollar's strength, according to JPMorgan researchers. That won't stop the Fed from raising interest rates into unwelcoming terrain. The Fed would eventually need to hike rates as high as 5%, according to Anna Wong, the head US economist at Bloomberg Economics, in order to solve the US's inflation problem.

Even though uncertainty persists on how quickly and how far the current inflationary crisis will affect many countries, there is a growing consensus that the worst of it is already behind many of them. The inflation peak should be reached quite soon, according to Oxford Economics' Priyanka Kishore. Of course, there could be anomalies. However, this is more a result of peculiar national characteristics than of general price pressures. It is a dream that there will be alarm bells around global inflation cooling down as news continues to break.

Having exhausted inflation at a local and global level in the simplest way possible, it is therefore our responsibility as members of the local society and the global community at large to understand the times we are living in without panic or anger but more with an open mind to learning and growing in understanding global trends and changes. One vital message I can give to each reader is that when it comes to local and global issues in today’s world, now more than ever – everything is connected.

References for further reading and understanding: