Inflation round-up

The combination of factors giving the world such an inflation headache at the moment is, of course, complex, but if you wanted to choose one above all others it would have to be energy prices. The sheer scale of their rise since Vladimir Putin decided to invade Ukraine has been breathtaking. European gas prices, for instance, reached ten times their ten-year average level at the end of August, an increase of 1,000%! Meanwhile, crude oil prices doubled between January and March and then stayed near their peak for several months. Considering that energy prices account for nearly 10% of most developed economies' normal price indices, with rises of such magnitude, virtually all other prices in the index would have had to have fallen to have prevented substantial inflation. 

The good news is that energy prices have fallen significantly in September. Indeed, oil prices have declined steadily since June. Moreover, the FAO's World Food Price Index, which also hit a peak following the invasion of Ukraine, has fallen for five consecutive months up to August (although China is fighting 'porkflation' and Africa is concerned about high fertiliser costs). So, with luck, the worst of the current cost of living crisis might just be over.

Unfortunately, declining energy prices have come about because of another potential problem: recession. Weak economic data from China especially have sent forecasts for demand for energy and other commodities down sharply, but the outlook for the rest of the world is fairly bleak too, not least because central banks everywhere are raising interest rates (which will harm growth) to fight inflation, even though the primary reason (a crisis of supply) behind soaring prices will not be tempered by changes to monetary policy. Historically, recessions have tended to be the cure for such periods of high inflation. The United Kingdom may already be in one.

Responses from governments across the globe as they scramble to prevent a ruinous cost of living crisis aren't limited to interest rate hikes. There are also increased subsidies and price caps on fuel and energy costs, while numerous countries have cut sales taxes temporarily, such as Uzbekistan. The UK is reducing other taxes in a bid to protect people's standards of living, possibly damaging the health of its own public finances in the process. Sri Lanka, whose economy is already in deep crisis, can't afford to cut VAT and has raised it instead. Meanwhile, Lebanon, which is in an even worse state, has had to end its fuel subsidies; a move certain to push inflation even higher.

Barring such outliers, the effort to reduce inflation is truly global and, one would hope, impactful. However, confidence among central bankers that the fight will be won does not seem entirely convincing at the moment. Indeed, according to The Economist, many of them are seriously worried that this might just be the beginning of an era of high inflation, rather than the end. So, hold on to your hats, everyone... New ones may soon be unaffordable.

Meanwhile, our table of high inflation countries grows ever longer: