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Inflation round-up

In our exchange-rates round-up earlier in March, we looked at the impact coronavirus was having on currencies around the world. However, the pandemic's effects on the other main expatriate cost of living factor, inflation, are harder to predict.

The nature of the economic crisis brought about by the Covid-19 outbreak is virtually unprecedented, because it provides simultaneously a supply shock, a demand shock and a financial shock.

With governments almost everywhere advising people to stay indoors whenever possible, the downward impact on consumer demand will be huge (as China's terrible economic data from January and February, when it was in lockdown, shows). Normally, such a massive loss of custom would send prices crashing into deflationary territory, but that hasn't happened in China, where the consumer price index hit an eight-year high in January (see last table below). Basically, the supply shock, as global and local value and production chains became severely disrupted, outweighed the demand shock, meaning the scarcity of goods and services available sent prices up rather than down. The same effect is likely to be seen across the world to at least some degree, with phenomena like panic buying and stockpiling accentuating the rise in inflation.

The third shock - the financial one - is beginning to develop and could be the most alarming in the longer term. We all saw the effects of the global financial crisis 12-13 years ago, the aftermath of which is still playing out. If concerns about bankruptcies and bad debts grow during the coronavirus pandemic, credit could swiftly seize up again as banks fear to lend and we could have another financial crisis on our hands. Inflation-wise, such an outcome would probably have a downward effect on prices because, with less credit available, the amount of money circulating - and therefore demand too - would be likely to fall. However, in such a complex environment as the global economy, impacts would be very hard to predict.

In the exchange rates blog post, we saw how emerging-market currencies were already suffering depreciation because of investors seeking security in the more stable currencies of the developed world. Such falls in currrency values, as regular readers will know, usually result in higher prices for imported goods. That effect is likely to add to the supply shock effect and we could see consumer price indices rising quite sharply in some parts of the developing world.

Several emerging markets are also big oil producers and, as if coronavirus wasn't difficult enough to deal with, they are now having to cope with an oil price slump brought about by loss of demand because of coronavirus and Saudi Arabia's launch a week ago of an oil-price war, whereby it greatly increased production and effectively flooded the market (probably hoping to price out smaller shale-oil producers in the United States). This action sent the cost of crude crashing below USD30/barrel. While it adds another deflationary influence to the complicated global cost of living picture, an opposite inflationary impact is likely to be seen in oil-producing countries whose currencies have plummeted along with the price of oil in recent days. The first table shows the extent of the currency carnage in a single week since Saudi Arabia took its shocking measures, and some of these mostly hydrocarbon-exporting countries could see fast-rising import prices, especially if exchange rate losses continue:

Countries experiencing largest currency losses in last week
Currency code Movement v EUR
9-16 Mar 2020 (%)
Australia AUD -5 1.8
Belarus BYN -4 4.3
Colombia COP -11 3.6
Iceland ISK -5 2.4
Israel ILS -4 0.3
Kazakhstan KZT -4 5.6
Mexico MXN -7 3.2
Norway NOK -7 0.9
Russia RUB -7 2.3
Uruguay UYU -8 8.3

Three countries have joined our high-inflation list (see next table) this period. Lebanon has been struggling for months with a political and economic crisis and recently defaulted on its foreign debt. According to reports, authorities have made renewed efforts to prevent official and unofficial exchange rates from diverging further, but nevertheless, the gap which has grown between them has amounted to a significant devaluation for importers and a rapid surge in inflation, which hit double figures in January.

Uzbekistan and Syria are the other 'newcomers' to the table, but in reality both may well have been suffering double-digit inflation for many months, but this has been unknown due to a lack of published data from authorities in both countries until recently. The Syrian inflation figure, although just published, is already out of date.

High-inflation countries (annual CPI 10%+)
Country CPI % Data month Trend IMF 2020 forecast %
Angola 17.5 Dec-19 ► Stable 15.0
Argentina 50.3 Feb-20 ► Stable 51.0
Ethiopia 18.7 Jan-20 ► Stable 12.7
Haiti 19.5 Aug-19 ► Stable 17.1
Iran 25.0 Feb-20 ▼ Falling 31.0
Lebanon 10.0 Jan-20 ▲ Rising 2.6
Liberia 30.9 Sep-19 ▲ Rising 20.5
Malawi 11.5 Dec-19 ▲ Rising 8.4
Nigeria 12.8 Jan-20 ▲ Rising 11.7
Pakistan 14.6 Jan-20 ▲ Rising 13.0
Sierra Leone 13.6 Jan-20 ► Stable 13.0
South Sudan 170.5 Oct-19 ▲ Rising 16.9
Sudan 64.3 Jan-20 ▲ Rising 62.1
Syria 10.4 Jun-19 ▲ Rising n/a
Turkey 12.4 Feb-20 ▲ Rising 12.6
Uzbekistan 15.2 Dec-19 ► Stable 14.1
Venezuela 9585.5 Dec-19 ▼ Falling 500 000.0
Zambia 12.5 Jan-20 ▲ Rising 10.0
Zimbabwe 540.2 Feb-20 ▲ Rising 49.7

In other inflation news, reports from Rwanda showed food prices there rising sharply because of changing weather patterns, sending overall inflation into watch-list territory (see last table). As climate heating intensifies, we can expect to see the weather impacting more and more on food prices, which account for a much higher weighting in the calculation of national inflation statistics than they do in ECA's cost of living surveys, which reflect expatriate lifestyles rather than those of local nationals.

Finally, following his decisive election victory in December, United Kingdom Prime Minister, Boris Johnson, sounds determined to "level-up" standards of living between his country's regions. However, increasing demand in areas with low mobility and low labour availability (especially with immigration due to fall) sounds to us like a recipe for higher inflation.

On watch! (notable rise in inflation, but below 10%)
Country Latest CPI % Data month Up from
Barbados 7.2 Dec-19 5.5% Aug-19
China 5.4 Jan-20 3.8% Oct-19
Jamaica 5.2 Jan-20 3.3% Oct-19
Kenya 5.8 Jan-20 3.8% Sep-19
Laos 6.9 Jan-20 3.9% Sep-19
Myanmar 9.5 Dec-19 8.3% Nov-19
Nepal 6.8 Jan-20 5.8% Nov-19
Rwanda 7.3 Jan-20 4.4% Oct-19
Sri Lanka 7.6 Jan-20 6.2% Dec-19
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