Unless governments act, the rising cost of living will be expensive

Unless governments act, the rising cost of living will be expensive

It is undeniable that after an extended period of price stability as a hallmark of the global economy, we have entered a new volatile era of high inflation and possible economic slowdown.
Due to the unique set of circumstances driving this rise in the cost of living, it is reasonable to expect that it will remain a major feature of global economies for the foreseeable future.
Worryingly, there is a generation of political and business leaders who have no experience of living and operating in such an environment, with all the risks that entails. After all, this is the first time in living memory that this phenomenon has been the result of an unholy combination of a global pandemic and a major war that affects the supply chain.
All segments of global society are feeling the effects of the rising cost of living, but it is hitting those who are already worse off the hardest, in both developed and developing countries. In its harshest form, it deprives people of the most basic commodities, including food, shelter, education and health, forcing them to make painful choices with both immediate and long-term effects on their well-being, including life expectancy.
If not addressed quickly, this crisis will not only lead to human suffering and loss of potential, but could also lead to social unrest or even social revolution. There are obvious and tangible hardships associated with runaway price increases, but runaway inflation also leaves psychological scars due to the uncertainties it creates and, with them, widespread and chronic anxieties for individuals, families and businesses.
In the more than two and a half years since the world was hit by an unprecedented pandemic, some of the assumptions of global economic stability have been thrown out the window. Governments with conservative instincts poured billions of whatever currency they use into their economies to stave off total collapse, and then into COVID-19 testing and vaccination programs, and rightly so. For the poorest countries, this was not even an option, and many suffered not only human but also economic losses due to the shutdown of manufacturing, trade and tourism activities, without the social safety nets and advantages for their citizens enjoyed by rich countries. .
Rising energy prices had accelerated inflation in many countries even before Russia’s invasion of Ukraine, and have intensified further since the start of the conflict in February, leading to enormous uncertainty about to Europe’s gas and food supplies and causing the prices of goods and services to soar. out of control.
This episode of inflation is not a sign of economies overheating; rather, it is the result of shortages created by unusual conditions, with a real fear that this could lead to stagflation – a most detrimental mixture of stagnant growth and inflation caused by supply-side pressures.
Inflation was once described as the cruelest tax of all, as it disproportionately affects the poor. A global poll by researchers from the World Bank and International Monetary Fund found that people who identify as very poor are 10.5% more likely to cite inflation as a top concern than those who are poor. identify as wealthy because it almost instantly reduces their quality of life.
For starters, those who are the worst off economically have to spend a greater proportion of their income on basic commodities such as food and energy, making them more vulnerable to price hikes.

Due to the unique set of circumstances driving this rise in the cost of living, it is reasonable to expect that it will remain a major feature of global economies for the foreseeable future.

Yossi Mekelberg

Moreover, those who are better off are better equipped to protect themselves against inflation because they hold various assets and, in times of austerity, they can dip into their savings until the dark clouds of hardship are gone. past. This privilege is not given to those who live hand to mouth and struggle at the best of times to support themselves and their families.
Safety nets and social benefits are more generous in some countries than in others, but inflation erodes their value. Worse, if the predicted stagnation materializes, it will likely be followed by tighter fiscal policies that will once again hurt the poor and lower middle classes who are more dependent on public services, including education and health, and even subsidized food or programs that facilitate economic and social mobility.
The global economy is not expected to emerge from this inflationary crisis anytime soon, as the COVID-19 pandemic is far from over and new variants could create new economic pressures. Meanwhile, the end of the war in Ukraine is not in sight.
The IMF predicts that the next two years will be difficult, with a real risk of generalized recession. In the midst of these crises, the issue of climate change has been relegated to the sidelines but, as recent heat waves in Europe have demonstrated, the need to deal with its devastating consequences is becoming ever more urgent – and these consequences, once again, hurt the most vulnerable in our societies.
If governments and international organizations are unable or unwilling to address the challenge posed by the gap between the rising cost of living and falling incomes, this increases the risk of social unrest, particularly in countries that suffer from deteriorating and inadequate governance.
According to the Verisk-Maplecroft Civil Unrest Index, the combination of rising prices and government cutbacks has already caused growing civil unrest in major emerging economies. This could create a snowball effect of political instability, which hurts investor confidence and in turn creates even worse economic conditions.
Given the very specific circumstances and causes of the current rise in the cost of living, and because inflation is at its highest level in decades, it is incumbent on governments to take urgent and coordinated action to contain it.
A tightening of monetary policies through sharp increases in interest rates was expected, but this also risks plunging countries into a deep recession, as it increases the cost of borrowing and housing, which could end up pushing several million more people below the poverty line while making them homeless.
Therefore, monetary and fiscal policies must be implemented with sensitivity by applying mechanisms to protect those who these measures could harm the most. Measures to contain inflation must avoid hurting people who are already struggling to survive and must not jeopardize the future of the younger generation. Otherwise, prices may stop rising, but the long-term social costs will be immeasurably horrendous.

• Yossi Mekelberg is Professor of International Relations and Associate Fellow of the MENA Program at Chatham House. He regularly collaborates with the international written and electronic media. Twitter: @YMekelberg

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