Giacomo Mangoni (Italy)
The impact of global inflation on social policy
Global inflation is rising exponentially, and this is due to rising energy and food prices. In addition to this, disruptions in the supply chain due to covid and the growing difficulty in finding a workforce in developed economies are exacerbating the situation. In the United States, inflation has reached record levels not recorded since the 1980s. To try to curb the rise in inflation, the Federal Reserve raised interest rates. However, this phenomenon is not affecting only developed countries but also developing countries which have historically had higher average inflation rates and weaker economy which is more negatively affected by international shocks. This poses serious problems for the populations of these countries and great challenges for the political classes who must find measures to face conditions that are becoming more and more difficult. In recent decades, inflation in developing countries had followed similar trends in developed countries going downwards. Even if the averages have always been higher than those of developed countries, thanks to technical progress, greater efficiency, macroeconomic adjustments as well as greater confidence in the international markets towards countries historically considered weak, we have gone from a rate of inflation above 10% in the decade between 1990 and 2000 to around 5% between 2010 and 2020. Now the situation is moving towards an increase which is expected to be even more important in the coming months.
These significantly worsening financial conditions come at a time when the macroeconomic climate in developing countries still appears to be severely compromised. In fact, the effects of the pandemic still weigh heavily, a sharply increasing poverty rate, combined with unemployment not yet reabsorbed by the labor market, which is slowly recovering from the shocks due to the forced lockdown. The expansive policies implemented have led to a significant increase in sovereign debts, which leaves little room to intervene again in the economies, and this suggests that conditions will worsen in the future. In addition to this, the deflationary policies triggered by the Federal Reserve could lead investors to withdraw their assets from countries considered more unstable and reallocate them to more advanced and stable economies. A flight of capital would therefore lead to a depreciation of local currencies and would trigger an even stronger inflationary spiral which would have repercussions on the weaker classes who would see their meager assets devalue even more. This could lead to the impossibility of accessing even those basic necessities. The increase in inflation appeared for the first time in early 2021 in the regions where most developing countries are present. The generalized increase in prices was mainly due to the increase in the cost of raw materials which then spilled over into all the other products up to the basic ones, such as food and medicines. Some countries such as Turkey, Argentina, Chile, and Lebanon experienced bouts of hyperinflation throughout 2021 that deeply hurt their economies.
The last few months have seen an intensification of inflationary pressures. Due to the war in Ukraine, a number of measures have been taken to target Russia. This made it impossible for Russia to supply many countries of the world with raw materials, thus causing a considerable increase in prices. Another important phenomenon was the restrictions in the supply chain as well as the restrictive measures implemented by China to deal with the spread of the covid which has reappeared in an important way in this country in recent months. As regards the current situation, among the factors that contribute most to the increase in inflation are: Rising gas prices as oil production lag demand and the war in Ukraine worsens the squeeze. Rising food prices after bad weather damaged crops and war in Ukraine hit grain production and costs. A surge in car prices, due in part to a shortage of microchip supplies dating back to the pandemic. Rents and home prices are higher as low-interest rates and remote working turbocharge the housing market during the pandemic and increase the cost of dozens of other items, including raw materials and furniture, many of which stem from Covid-related production and logistics problems.
Inflation is a generalized increase in prices within a given period of time which causes a decrease in people's purchasing power. Inflation is often accompanied by a devaluation of the currency of the financial system where inflation occurs. Within the European Union, an inflation rate of 2% is considered a target objective, while in other geographical areas there is greater tolerance for higher rates. In all economies of the world, double-digit or even higher inflation rates are almost always a cause of great political instability, population impoverishment, and shortages in the supply of basic necessities. Inflation is sometimes classified into three types: demand-driven inflation, cost-driven inflation, and embedded inflation. The most commonly used indices of inflation are the consumer price index and the wholesale price index and they can be viewed positively or negatively depending on the individual's point of view and the rate of change. Those who own tangible assets, such as property or stored assets, may want to see some inflation as this increases the value of their assets. Inflation aims to measure the overall impact of price changes for a diverse set of products and services. It allows for a single representation of the value of the increase in the price level of goods and services in an economy over a period of time.
In the US, inflation started to pick up during the pandemic, as government spending, including family allowances, kept demand unusually high. In many other parts of the world, such as Europe, the problem stems from more recent issues, such as the war in Ukraine. Inflation doesn't affect everything equally. For example, gas prices could double while real estate loses value. That's what happened during the 2008 financial crisis. Home prices deflated, dropping nearly 20%. Meanwhile, inflation has occurred in oil prices. They hit an all-time high of $128 a barrel in July 2008. As oil prices affect gas prices, the cost of gas has soared above $4 a gallon in some parts of the United States, from an average of just over $3 from the previous year. Gas prices soared again in 2022, with the average passing the $5-a-gallon mark in June. The US economy, which was still recovering from the pandemic-induced slowdown, saw the consumer price index rose to 9.1%, its highest level since November 1990. Sometimes inflation is good for the economy. When it is mild, inflation has a healthy side effect. Once people start expecting inflation, they spend now rather than later because they know prices will be higher in the future. Consumer spending drives economic growth. In effect, the Federal Reserve sets an inflation target. He wants a healthy core inflation rate of 2%. The Central Bank wants some inflation, which also leads consumers to believe that prices will continue to rise.