Global inflation – the case of 2022

General explanation of inflation. While it is easy to measure the price changes of individual products over time, human needs go beyond just one or two products. Individuals need a large and diverse set of products and a range of services to lead a comfortable life. These include commodities such as grain, metals, fuel, utilities such as electricity and transportation, and services such as health, entertainment and labor.

Inflation aims to measure the overall effect of price changes for a diversified range of products and services. It allows for a single value representation of the increase in the price level of goods and services in an economy over a given period of time.

Prices rise, which means that a unit of money buys fewer goods and services. This loss of purchasing power affects the cost of living for the common people and ultimately leads to a slowdown in economic growth. The consensus among economists is that sustained inflation occurs when a nation's money supply growth outstrips economic growth.

How Inflation Has Changed the Price of a Cup of Coffee Over Time. Source Investopedia

To combat this, the monetary authority (like the central bank) takes steps to manage the money supply and credit to keep inflation within permissible limits and keep the economy running smoothly.

Theoretically, monetarism is a popular theory that explains the relationship between inflation and an economy's money supply. For example, after the Spanish conquest of the Aztec and Inca empires, large amounts of gold, and especially silver, flowed into the Spanish and other European economies.

As the money supply increased rapidly, the value of money fell, contributing to the rapid rise in prices.

Conclusion? The EU is the world's largest natural gas importer. Diversification of supply sources is therefore crucial for both energy security and competitiveness. Providing access to the liquid gas markets of all member states is the main objective of the EU Energy Union. LNG cargoes are available from a wide variety of different supplier countries around the world; LNG can give a real boost to the EU's gas supply diversification and thereby greatly improve energy security.

Today, countries with access to LNG import terminals and liquefied gas markets in Western Europe are much more resilient to potential supply disruptions than those that depend on a single gas supplier. The global LNG market is experiencing a dynamic development with the entry of new suppliers such as the US or Australia.

The EU's current gas demand is around 400 billion cubic meters (bcm) and is expected to remain relatively stable in the coming years, based on currently adopted policies. It should be noted that the expected decline in domestic gas production also affected natural gas imports. However, other policies designed to meet the 2030 energy and climate targets could lead to reductions in gas use, particularly due to energy efficiency improvements in heating and industry.

EU member states agreed on 26 July to voluntarily reduce their natural gas demand by 15% this winter compared to their average consumption over the past five years, in order to save natural gas before the winter season and prepare for the possible new situation due to interruptions in gas supply from Russia.

According to the Council of Europe, some of the measures include reducing gas consumption in the electricity sector, promoting fuel switching in some industries, adopting national awareness campaigns and implementing obligations to reduce heating and cooling.

Now, whether Europe survives the approaching winter depends on how the continent can get more gas from Russia via Nord Stream 1, how it can buy it in the form of liquefied natural gas from other suppliers, how severe the weather conditions will be this winter, and how much gas European countries can get.

Current inflation situation. The annual inflation rate for the US is 8.5 percent for the 12 months ending July 2022, after previously rising 9.1%, and the highest since November 1981, according to US Department of Labor data released August 10. at high level. The next inflation update is scheduled to be released on September 13.

United States Annual Inflation Rates (2012-2022)  Source: U.S. Inflation Calculator

Annual Inflation Rates by Month and Year. Source: U.S. Inflation Calculator

Where inflation is highest and lowest in 44 countries. The chart includes 37 of the 38 member countries of the Organization for Economic Co-operation and Development (OECD) and seven other economically important countries for which the OECD provides data. Source: Pew Research, OECD

Global inflation rate from 2017 to 2027 (compared to the previous year) Source: Statista

 The issue with Russia – Ukraine. As the war continues in Ukraine, the effects of physical destruction and sanctions are causing additional shocks to the global economy. The effects will be higher energy prices and a weakening of confidence in the economy and financial markets in a world already suffering from pandemic-induced inflation.

Russia's invasion of Ukraine caused inflationary expectations to rise. CFOs view inflation as one of the most important future risks.

Inflation has remained consistently low over the past decade, but recent surveys have revealed that CFOs expect upward pressure to emerge. This pressure has indeed come into existence and has been exacerbated by the war and supply chain disruptions.

Russia and Ukraine are major suppliers of certain products, including titanium, palladium, wheat and corn. The impact of the war on commodity prices and inflation, and therefore household spending, is more important than potential contagion through trade links with other countries.

We continue to expect commodity prices to rise due to the interruption of food and other exports from Ukraine and the sanctions imposed on exports from Russia. The modeling assumptions are that the war caused a 30% increase in oil prices, a 90% increase in European gas prices and a 17% increase in food prices. As we saw in our previous research article “Russian Gas Supply Outage”, as of today, wholesale gas prices have skyrocketed more than 400% since August 2021, squeezing households already in the grip of a cost-of-living crisis and forcing some energy-hungry industries, fertilizer to cut production and aluminum manufacturers.

Naturally, high energy prices feed inflation. In the US, for example, energy accounts for 7.6% of the consumer price index, while energy commodities such as fuel make up 4% and energy services such as electricity and piped gas make up 3.3%. In the UK, electricity, gas and other fuels account for 3.3% of the CPI, while fuels and lubricants account for an additional 2.7%.

Global and regional forecast change in inflation rate due to the Russia-Ukraine war in 2022 and 2023. Source: Statista

 The dilemma of growth and inflation. The major central banks have finally admitted that inflationary pressures are permanent. Both the Fed and the European Central Bank now acknowledge that price increases are not a temporary phenomenon. In July, headline inflation reached 8.5% in the US. In the Euro Zone, it was 8.9%. Both central banks have pledged to meet the challenge. In June, the Fed decided to raise the benchmark rate by 75 basis points (0.75 points). The interest rate is expected to reach 3.4% by the end of the year. The ECB has announced a walking cycle of its own, although it has taken a more cautious approach.

Both central banks face a very challenging environment as much of the inflation is driven by factors beyond their control. These include Covid-induced supply bottlenecks, such as the war in Ukraine, which has caused commodity prices to rise, as well as restrictions in China.

However, this is where the similarities between the Fed and the ECB end. The inflation and GDP growth outlook complicates the ECB's task. European inflation is still largely supply driven rather than demand driven. In other words, unlike the US, the EU economy has never come close to overheating, at least until recently. In fact, in most cases EU economies are still trying to get back to pre-pandemic GDP levels.

That's why many analysts talk about the risk of stagflation, a combination of high inflation and a stagnant economy. Monetary policy is further complicated by an increase in prices in the range of 6 to 8% in some countries (such as France, Germany and Italy), while in others (for example, some of the Baltic countries) the distribution of inflation rates close to 20%.

With inflation and growth already moving in opposite directions, the ECB has tried to tune its response very carefully. Any excessive action on inflation will worsen output in general, not just in weaker Eurozone countries. Germany is an example at this point, given its dependence on Russian oil and gas and its strong manufacturing sector, which has made the economy more prone to supply bottlenecks.

Any sudden increase in interest rate movements may have negative repercussions in the housing market. Aware of the risk of banks' exposure to real estate assets and the potential financial stability implications of the suddenly cooling housing markets in Germany and elsewhere, policymakers will choose to take a cautious approach.

The case of Turkey. Less than a year before the presidential and parliamentary elections, the Turkish government focused on growth to contain the complaints of the people, but the out-of-control inflation and currency crisis deepen poverty.

Consumer prices in Turkey rose 1.46% from July to August, with annual inflation reaching a 24-year high of 80.21%, according to official data released on Monday.

Inflation has soared since September 2021 amid the Turkish lira slump fueled by the central bank's unorthodox rate cuts. The rise in global energy and commodity prices after Russia invaded Ukraine in February made things worse.

Turkish authorities announced new gas and electricity hikes on 1 September - around 20% for households and around 50% for businesses.

Energy expenditures are the most important item in the housing category of the inflation basket, where prices increased by 2% in August and the annual rate reached approximately 72%.

Food prices rose by around 0.9% in August, while annual food inflation reached 90.3%. The price of bread alone, an essential staple food for low-income consumers, increased by more than 101% in one year.

The recent relative relaxation in global energy prices led to partial reductions in gasoline and diesel prices last month and contributed to a 1.8% decrease in transportation group prices. However, annual inflation in this category was as high as 117%.

Prices of durable goods such as furniture, white goods and electronic goods increased by 3.3% in August. The rise that continued for months brought the annual inflation in the sector to over 92%.

With the effect of the high season in tourism, hotel, cafe and restaurant group prices increased by approximately 3.3% in August, while the annual rate climbed to approximately 81%.

With the start of the new academic year, prices in the education group increased by 6.5% in August. In the health group, price increases reached 7%.

In addition, the 12-month average of October producer inflation will form the basis for public goods and services increases next year. This means that the prices of public transport and other services, along with the taxes and fees charged by the government, will increase by an estimated 125%, which alone is a sign that the inflation storm will barely subside in 2023.

On the bright side of the coin, President Mr. Recep Tayyip Erdogan's ambition to keep the economy warm despite galloping inflation led to 7.5% growth in GDP in the first half of the year. Turkey's GDP grew by 11.4% in 2021. However, the sustainability of the factors contributing to this expansion is unlikely.

Conclusion? Governments around the world should focus on structural reforms to drive growth in the medium term while maintaining tight control of monetary policy. If inflation is not reined in globally, it could plunge the world into an unprecedented global crisis.

Russia's invasion of Ukraine compounded the damage done by the COVID-19 pandemic, magnifying the slowdown in the global economy that could enter a prolonged period of weak growth and high inflation, according to the World Bank's latest Global Economic Prospects report. This raises the risk of stagflation, with potentially harmful consequences for both middle- and low-income economies.

Global growth is expected to decline from 5.7% in 2021 to 2.9% in 2022 – significantly lower than the 4.1% expected in January. It is expected to hover at this pace in 2023-24 as the war in Ukraine disrupts activity, investment and trade in the short term, stifled demand reduction and the withdrawal of fiscal and monetary policy adjustments. As a result of the damage done by the pandemic and war, per capita income in developing economies this year will be about 5% below its pre-pandemic trend.

Kaynak:Tera Yatırım-Enver Erkan
Hibya Haber Ajansı