5 problems behind the global cost-of-living crisis

An aid worker prepares emergency food aid for displaced Yemenis on the outskirts of the capital, Sanaa, last month. (Yahya Arhab/EPA-EFE/Shutterstock)
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Around the world, the cost of living is on the rise.

In Britain, annual inflation hit a 40-year high in April, at 9 percent, with food and energy prices spiraling upward. Similar highs are plaguing other wealthy nations, including the United States, where the annual inflation rate last moth was 8.3 percent.

But soaring costs aren’t only a problem in the wealthier parts of the world. Annual global inflation is set to reach 6.7 percent this year, according to the United Nations, with developing countries in western Asia, Latin America and the Caribbean also feeling the pinch.

Even in the poorest countries, prices are climbing. In some regions of war-torn Yemen, basic foods were 85 percent more expensive in March than a year before, according to the Famine Early Warning Systems Network, which monitors global food insecurity.

In some countries, distinct factors are in play, such as Brexit and tax hikes in Britain.

But a range of issues that cut across borders is disrupting the modern global economic system and driving inflation around the world, among them the mammoth-scale problems of disease, war and weather.

Surging global food prices put staple meals out of reach

1

The coronavirus pandemic

Economists date the start of today’s global inflationary troubles to the coronavirus. Its spread was clearly an economic shock, with borders closed and businesses and factories shut down.

But in many ways, it was only when the world began to recover from that initial shock that inflation started to kick in. Part of this was the result of what economists call “base effects” — that is, because prices were flat or even falling during the worst of the pandemic, short-term inflation became more noticeable as it started from a lower base.

It is apparent, however, that the rise in prices goes beyond that.

With demand down and travel restrictions still in place, supply chains have been upended. If a car manufacturer in South Korea faces a shortage of semiconductors, it will pass on the added costs of buying these chips to the consumer. And when countries emerged from shutdowns, there was often a surge in demand that led to higher prices — particularly for services, such as tourism.

Ukraine says Russia is stealing grain, which could worsen food crisis

2

The war in Ukraine

Russia’s invasion of Ukraine on Feb. 24 injected new uncertainty into the global economy. The war has particularly affected energy and food, both key sectors in which inflation is high.

With Russia, a key energy exporter, under sanctions and with governments in North America and Europe pledging to wean themselves off Russian coal and oil, energy prices have risen for many households. The costs have also hit drivers, with a gallon of gasoline passing $4 in every U.S. state for the first time ever this month.

Ukraine and the broader Black Sea region, meanwhile, are often referred to as the “breadbasket” of Europe because of their production of wheat, corn and other agricultural goods. With much of that trade upended by the war, global food prices have soared and are now near record highs. There are numerous knock-on effects: Corn prices have risen because of the push to use ethanol, while Russia has limited fertilizer exports.

Many of the worst impacts of food prices are being felt in countries that are already food insecure. Yemen, for example, relies on Ukraine or Russia for 46 percent of its wheat imports.

Chinese city with ‘zero covid’ still hit by pandemic economic woes

3

China slows down

For years, China has been a key factor behind global economic growth. But the country’s economic woes and protracted exit from its “zero covid” policy are contributing to the problem of global inflation.

In a recent news release, Fitch Ratings warned that coronavirus lockdowns in Shanghai and other Chinese cities would “exacerbate global supply-chain pressures and inflation concerns,” noting a plunge in freight traffic in Shanghai’s port as workers were unable to load and unload ships at their usual pace.

And last month, Chad P. Bown and Yilin Wang of the Peterson Institute for International Economics noted that even before the Russian invasion of Ukraine, China had put pressure on global prices by imposing export restrictions on key international goods including fertilizer and steel.

China took these actions amid concerns about rising prices at home, but the country is such a large producer and consumer of international goods that there were major knock-on effects on the global market.

Bown and Wang wrote that China was often “selecting the policy that solves a domestic problem by passing along its cost to people elsewhere” and argued that a lack of a fully functioning World Trade Organization and the broken U.S.-China relationship made matters worse.

Climate change has made India’s relentless heat 100 times more likely

4

Climate change

Unpredictable weather events, such as droughts that damage crops and storms that upend trade routes, are increasingly seen as a key factor in the rising cost of living.

In India, the government has responded to a record-setting heat wave that put a strain on millions with a ban on wheat exports. The country, which accounts for nearly a third of the world’s wheat supply, had previously pledged to help “feed the world” amid the ongoing food crisis, Prime Minister Narendra Modi said earlier this month.

But after temperatures unexpectedly soared in a heat wave that scientists said was made worse by the changing global climate, those exports were blocked.

India is just the latest country hit by extreme weather that destroyed crops: Brazil, another major food exporter, suffered through drought last year that hit its agricultural industry. The country’s inflation reached over 12 percent in April. And it’s not just food prices that are affected. Lumber is more expensive after floods and fires in British Columbia, leading to knock-on effects in housing and construction.

And at the same time, efforts to transition to a green economy are putting more pressure on prices for commodities such as lithium used for batteries and copper for wiring and computer chips.

Many experts say that this “greenflation” should be temporary and that a green economy ultimately will be less vulnerable to energy shocks, but the short-term expense of the moves could derail the move toward that economy.

In Turkey, critics say the sultan has no clothes. Erdogan’s advisers won’t tell him.

5

Inflation driving inflation

Some economists argue that inflation itself can lead to more inflation if workers and businesses begin to expect it and demand higher salaries or set higher prices for goods — creating, in effect, a self-fulfilling prophecy.

But there are other ways in which inflation in one country can lead to inflation in another. Inflation in the United States led to a rise in the value of the dollar as investors expected interest rates to rise.

At the same time, many countries have found that their currency is much less valuable than it was a year or two ago. In Turkey, where the lira’s value has plunged, that means imports cost huge amounts of money (annual inflation in Turkey is near 70 percent).

Interest rate increases will also hit countries already saddled with debt, making it harder for them to provide relief from inflation. The International Monetary Fund warned last month that countries in emerging markets that had already borrowed heavily to fund pandemic relief measures were at risk of a “doom loop” that could, in its worst case, result in governments defaulting.

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