Need Of Steady Hand To Tackle Storm Clouds Of Global Inflation

To combat the storm clouds of global inflation, a steady hand is required.

After the few years of the onset of the pandemic, inflation has become one of the main concerns for the global economy where the world appears to be moving towards a stage of acceleration in inflation not seen in the last forty years and this inflationary surge is being felt not just by the advanced economies but also by the majority of emerging markets and developing economies. Although its causes vary across countries, the task of resolving the problem ultimately will fall to the world’s major central banks.

This global Inflation has come back faster, spiked and proved to be more stubborn and persistent than major central banks initially thought possible. In 15 of the 34 countries classified as Advanced Economies by the International Monetary Fund as per World Economic Outlook, 12-month inflation through December 2021 was running above 5%. Such a sudden, shared jump in high inflation (by modern standards) has not been seen in more than 20 years.

Nor is this inflationary surge limited to wealthy countries. Emerging markets and developing economies have been hit by a similar wave, with 78 out of 109 EMDEs also confronting annual inflation rates above 5%. That share of EMDEs (71%) is about twice as large as it was at the end of 2020. Inflation thus has become a global problem – or nearly so, with Asia so far immune.

The primary drivers of the inflation hike are not uniform across countries, where fiscal and monetary stimulus in response to COVID-19 was limited as a result, the rejuvenation of Inflation bolsters Inequality within and across the nations.

In addition, the impact of the pandemic and recovery patterns are totally different among different nations depending upon their incomes where recovery only indicates the economy’s return to its 2019 level of per capita income. About 41% of high-income countries met that threshold at the end of 2021, compared to 28% of middle-income EMDEs and just 23% of low-income countries.

But the phase of the Global Pandemic broadens the disparity between advanced and developing economies because many EMDEs were already experiencing a fall in per capita income before the Pandemic while AEs were touching new heights but the thing in common is the rise in commodity prices and it is observed that, on January 2022, oil prices rises to 77% from 2020 December level.

Another major and common issue affecting advanced and developing economies is global supply chains, which continue to leave its footprints in the last 2-2.5 years where transportation costs have skyrocketed and unlike the oil-based supply shock of the 1970s, the COVID-19 supply shocks are more diverse and opaque, and therefore more uncertain.

In EMDEs, currency depreciation due to lower inflows of foreign capital and down trends of credit ratings has contributed to inflation among imported goods and an expected rise in inflation in EMDEs causes currency fluctuations and results in exchange rate deviations.

Another important factor which I consider to be the most important and harmful is food inflation. During 2021, 12-month increases in food prices exceeded 5% in 79% (86 out of 109) of EMDEs. While 27% AEs experienced price hikes exceeding 5% which harshly hits lower-income countries and impacted as a regressive tax. Food accounts for a much larger share of the average household consumption basket in EMDEs, which means that inflation in those economies is likely to prove persistent. Today’s higher energy prices will translate directly into higher food prices tomorrow (through higher costs for fertilizer, transport, and so forth).

Indeed, the most salient feature of today’s inflation is its ubiquity. In the absence of global policy options to resolve supply-chain disruptions, the task of addressing inflation is left to the major central banks. But a more timely and robust policy response from major central banks would not be good news for EMDEs in the short run. Most would experience higher funding costs, and debt crises but the longer-term costs of delaying action would be greater as we all know that, “Prevention is better than cure”.

Focusing on Pakistan, Pakistan’s economy is expected to grow by only 2 percent in the current fiscal year ending June 2023. According to the World Bank’s October 2022 Pakistan Development Update, the slower growth will reflect damages and disruptions caused by catastrophic floods, a tight monetary stance, high inflation, and a less conducive global environment that harshly impacts the poor.

Recovery will be gradual, with real GDP growth projected to reach 3.2 percent in the fiscal year 2024. The recent floods are expected to have a substantial negative impact on Pakistan’s economy and on the poor, mostly through the disruption of agricultural production, Inflation in Pakistan is expected to reach around 23 percent in FY23, reflecting flood-related disruptions to the supply of food and other goods, higher energy prices, and difficult external conditions, including tighter global monetary conditions.

We must be careful in advising inflation-targeting strategies. A rapid tightening of the monetary policy is not the only anti-inflation tool as it can excessively depress output and employment. Careful coordination of monetary and fiscal policies is required to gain the required objectives. Food-price inflation has the most direct effect on people’s lives in Pakistan and we struggling to address it over the years as food price inflation in Pakistan exceeds the rise in the overall consumer price index.

Efforts aimed at reducing prices through administrative measures. Policymakers must realize that the government’s involvement in the agriculture sector distorts markets where only meaningful work can redefine the role of the state in commodity operations by limiting the maintenance of strategic reserves and improving regulation and research. Research spending should be raised from 0.8 percent of the GDP to at least two percent.

Correct incentives for improving cropping patterns and alignment of universities and research organizations with farmers are the need of time to cope with the increasing need for food. In Pakistan, our goal must be to manage the supply of commodities and cheaper fuels, improve the performance of competitive markets, ensure no rupee undervaluation, and limit the rate of monetary expansion to a low double-digit rate are advisable with a hope that actions along with work on the fundamentals will bring down the rate of inflation.-Courtesy: Pakistan & Gulf Economist slot