Inflation as a Result of Inflation
Global inflation rates over the past year have been higher than they have been since 2012; similarly, inflation percentages in the United States (US), the United Kingdom (UK), and the European Union (EU) since the start of the second quarter have been staggering. In the US, the UK, and the EU, the primary driver of the recent Consumer Price Index (CPI) elevation, in the US, and the Harmonized Index of Consumer Prices (HICP) in Europe, is the rising cost of energy and consumer commodities. The rising cost of consumer commodities, especially food, housing, and petroleum products has struck the world into a tumultuous spiral, causing the cost of living to rise to a level not seen since the 1980s, resulting in the global experience of all three types of inflation. Typically, only one form of inflation is seen; however, this reversion to a 1980s economy is the result of many factors and is relatively uncommon. This spiral has fueled riots and protests across Europe, causing protestors and legislators alike to demand monetary reform.
Over the past year, gas prices have risen 96% in the UK, and electricity prices have risen by 54% (Harker, 2022), according to a paper published by the House of Commons Library. The causes of these raging increases are multifaceted. For starters, the Russian invasion of Ukraine has destabilized the supply of fossil fuels to Europe. As a result, the importation of those products must come from other sources, at a new premium. In 2021, Russia was the largest single supplier of petroleum oils and natural gas to the European Union at 25.9%. One year later, the EU sourced 38.2% of its petroleum oils from Angola, Saudi Arabia, Brazil, and the UK (“The impacts and policy implications,” 2022). With a decreased reliance on Russian products came hikes in the prices of gas, electricity, and food. Additionally, the value of the British Pound and the Euro have fallen. This presents a problem for European nations, making their buying power reduced, causing oil and other wholesale commodities to be more expensive, which means that prices must go up domestically.
Russia and Ukraine are two of the largest agricultural producers globally. In addition to being the world’s leading exporter of wheat, a very energy- and nutrient-dense food, Russia is also the world’s leading exporter of fertilizer. Because Russia is a major producer of potash, nitrogen, phosphate, and natural gas, just a few of the ingredients in fertilizer, it can control a substantial proportion of the world’s available fertilizer. This control has the potential to influence the world’s yield of crops as most farmers rely heavily on fertilizer and crop nutrients. Although the US can maintain its domestic fertilizer production, in 2021 it imported 20% of its fertilizers from Russia. Not all countries have that advantage. If Russian fertilizer becomes unavailable and Canada, China, and the EU raise their prices to ameliorate their economic circumstances, then nations such as Brazil, Singapore, and Panama will suffer the economic consequences; likewise, the world will suffer a major food shortage if the tradelines are not restored. In the same vein, the prices of unprocessed food will skyrocket as it becomes scarcer, only increasing the cost of living for people globally. The unadjusted twelve-month CPI for food in the US in September was 11.2 (U.S. Bureau of Labor Statistics, 2022), and in the EU, the HICP for food was sitting at 13.8 in September. Although the US will have to rely more heavily on domestic agricultural production, specifically fertilizers, in the coming months and years, as wheat, corn, rice, and soy is projected to become scarcer, the food CPI is anticipated to remain relatively low compared to the EU’s food HICP. Despite this potentiality, Russia and Ukraine have signed agreements with Turkey and the UN that will allow the relatively free flow of Ukrainian wheat and Russian fertilizer out of the Black Sea; however, the deal, signed on July 22nd, expires on November 19th but has the potential to be renewed.
In the United States and Europe, the cost of labor has risen an average of 8.6% since September 2021. This has resulted in built-in inflation as producers have raised prices to keep profits high. In parallel, the cost of raw materials has been rising since COVID-19 shocked the world. Whilst the price of lumber has been on the decline since the start of the year, the price index of all raw materials has been consistently high since 2020, despite a recent fall. The somewhat ubiquitous rise in labor costs and raw material price hikes have resulted in cost-push inflation. Because the price of production has increased, the out-of-pocket cost for consumers has also increased as demand has remained relatively stable. The ease of cost-push inflation cropping up comes as demand-pull inflation is in full effect. Due to international supply-chain shortages and bottlenecks, there is an overall shortage of many commodities. This shortage has resulted in increased prices since the start of the pandemic. The unique quality of the current state of inflation is that the concurrent activity of each type of inflation is causing a snowballing effect on prices due to the current intrinsic interplay between each type. To combat this compounded inflation, the US Federal Reserve and the European Central Bank are both reducing the number of bills they plan to print next year. In addition, they have both raised interest rates considerably. The intent behind raising interest rates is to increase the cost of money and lower the supply, thereby slowing the economy and lowering inflation.
In a study conducted analyzing the impact of inflation and inflation uncertainty on the economic growth nexus of South Africa from the first quarter of 1961 to the fourth quarter of 2019, the authors found that “...inflation harms economic growth in both the short and the long run while inflation uncertainty is insignificant in the long run but have a significant detrimental impact to economic growth in the short run” (Mendaya, 2021). As people and corporations grow uncertain about the economic future, their investment decisions are negatively impacted by this uncertainty. This negative impact is short-lived; however, it hinders economic development and growth while inflation is still high, further affecting the economy. Because of this, it can be extrapolated that for the foreseeable future, inflation will remain high, and the global economy will likely continue to wobble.
References
Eurostat. (2022, September 15). Second Quarter of 2022. Euroindicators. Retrieved November 7, 2022, from https://agriculture.ec.europa.eu/documents_en
The Federal Reserve. (2022, November 4). Currency Print Orders. Board of governors of the Federal Reserve System. Retrieved November 7, 2022, from https://www.federalreserve.gov/paymentsystems/coin_currency_orders.htm
House of Commons Library, Harker, R., Barton, C., Wilson, W., & Stewart, I., Rising cost of living in the UK 1–47 (2022). London.
The impacts and policy implications of Russia's aggression against Ukraine on agricultural markets. OECD. (n.d.). Retrieved November 7, 2022, from https://www.oecd.org/ukraine-hub/policy-responses/the-impacts-and-policy-implications-of-russia-s-aggression-against-ukraine-on-agricultural-markets-0030a4cd/
Jenkins, S. (2022, October 4). How the russia-ukraine war helped fuel record fertilizer prices. Saint Louis Fed Eagle. Retrieved November 7, 2022, from https://www.stlouisfed.org/publications/regional-economist/2022/oct/russia-ukraine-war-record-fertilizer-prices
Mandeya, S. M., & Ho, S.-Y. (2021). Inflation, inflation uncertainty and the Economic Growth Nexus: An impact study of south africa. MethodsX, 8. https://doi.org/10.1016/j.mex.2021.101501
U.S. Bureau of Labor Statistics. (2022, October 13). Consumer price index summary - 2022 M09 results. U.S. Bureau of Labor Statistics. Retrieved November 7, 2022, from https://www.bls.gov/news.release/cpi.nr0.htm
U.S. Bureau of Labor Statistics. (2022, October 28). Employment Cost Index. Employment Cost Index - September 2022. Retrieve
