Less Bang for the Buck

Economists normally define inflation as a general rise in prices and a fall in the purchasing value of money. In other words, prices rise, and consumers get less bang for their buck. In several major economies, inflation is increasingly becoming a concern. Invariably, this is having knock-on effects in many other parts of the world.

In the United States (US), there has been a year-on-year 6.2% cost-of-living increase. Consumers are paying more for vehicles, clothes, food, and energy. In China, inflation rose at a 1.5% annual rate a month ago, effectively doubling from the previous month. Germany recorded an inflation rate of 4.5% last month, compared to 4.1% in September. In the United Kingdom (UK), the central bank is predicting an inflation rate above 5% by the first quarter of 2022.

The US is the world’s largest economy and a major trading partner for many countries. US financial markets also remain the most important. In the case of China, it is still the world’s largest manufacturing hub. With respect to Germany, it is the largest economy in the European Union (EU) and a major manufacturer of high-end goods. The UK is also the world’s fifth largest economy and still a major trading partner for many Commonwealth countries.

The US, China, Germany and the UK are 4 of the 5 biggest economies in the world. Together, they account for nearly 40% of the global economy. It therefore stands to reason that in a context where they are all encountering massive inflationary pressures simultaneously, hardly any part of the world would be left unscathed.

Of course, this is no comfort to the many who are struggling to make ends meet. It is also no comfort to governments that will invariably have to strengthen and expand social safety nets which are already stretched due to the impact of the novel coronavirus (COVOD-19) pandemic.

No one can predict when global inflationary pressures will subside. Even if energy prices fall, there is still the problem of scarcity of certain goods, largely due to supply chain and logistics challenges in several major economies. Meanwhile, many consumers across the world are feeling the pinch. Unfortunately, those at the lowest income levels are the ones who tend to feel it most.

Capital Economics, an independent economic research consultancy based in London, has warned that it was difficult to tell when inflationary pressures would stabilize. Worryingly, Capital Economics notes that the evidence suggests that inflationary pressures are broadening out, meaning that inflation will remain high for a long while yet.

While government policy can play a role in combating the effects of inflation, for small economies, this could come at a significant cost.

As stated before, there is the option of strengthening and expanding social safety nets such as social welfare programmes. Some governments can also choose to implement price control measures. However, these usually come at a significant cost, including job losses and the threat of economic recession.

There is certainly a role for the private sector in lessening the impact of inflation. For example, overhauling procurement practices in terms of where they source goods and services could be useful in as far as it leads to more efficient and cheaper sourcing. Furthermore, energy is a major cost for many companies and the quicker they transition to energy independence through renewables for daily operations and transport may provide room to pass on cost savings to consumers. However, this is more of a medium-to-long-term prospect as energy transition is unlikely to happen at the required speed and scale to positively impact the problem at hand.

Finally, where the public sector can complement the efforts of the private sector is with respect to greater efficiency in service delivery. Automation, paperless systems and more flexible hours in places such as customs and ports can go a far way in stretching the buck a little further.