Have you noticed that you are spending more money on buying your supplies lately? Or you may have noticed that you can no longer afford some of the things you used to be able to buy.
The reason for the rise in prices that we are currently observing is the high inflation rates. According to the International Labor Organization, the annual inflation rate worldwide more than doubled during the period from March 2021 to March 2022.
The inflation rate in March 2022 was 9.2 percent, compared to 3.7 percent in the same month last year.
A high inflation rate means an increase in the prices of basic goods and services such as food, energy, transport and clothing, which in turn leads to an increase in the cost of living.
What is inflation?
Simply put, inflation refers to the rise in the cost of goods and services over a given period of time.
The money you carry in your pocket will buy you a smaller than normal amount of a commodity.
Why does this happen?
It may sound complicated, but there are simple causes for inflation. Here are two examples:
• demand driven inflation
When the demand for a good or service increases, it can lead to higher prices. This usually happens when the economy is recovering, and people feel confident about economic conditions, leading them to spend more money instead of saving it.
Demand-driven inflation begins with an increase in consumer demand. Merchants try to meet demand by increasing supply, and when there are not enough additional goods to increase supply, merchants raise their prices, leading to demand-driven inflation, also called “price inflation.”
• cost inflation
This occurs when the cost of producing goods or services increases, and that increase is passed on to the consumer.
This is what we have seen around the world recently. The COVID-19 pandemic and the war in Ukraine have disrupted supply chains and made it difficult for companies to manufacture and deliver goods, but we will go into more detail later.
How does the picture differ around the world?
In many countries, inflation has reached double digits in recent years.
In Turkey, for example, the annual inflation rate has recently risen to 70 percent, and in Argentina it has reached about 51 percent, and in Sri Lanka, which is suffering from an economic crisis and has witnessed a state of instability and its prime minister was forced to resign, the inflation rate last April was about 30 percent.
In Iran there were protests due to high food prices. The official inflation rate is around 40 percent, but some estimates put it above 50 percent.
What is hyperinflation?
Excessive, or runaway, inflation indicates that conditions are out of control.
The term hyperinflation is used to refer to a high and accelerating rate of inflation that reduces the real value of the local currency.
This has happened in many countries such as Lebanon, Venezuela and Zimbabwe.
Let’s take wheat for example. Ukraine and Russia are two of the world’s largest exporters.
Many countries depended on wheat imports from these two countries, but when the war broke out in Ukraine, grain exports were disrupted, which ultimately led to lower supplies and higher prices.
Things become even more complicated when wages cannot keep up with the rising inflation rate.
This leads to a decrease in purchasing power, making it difficult to maintain your basic living standards.
What is currently causing inflation?
There are many factors.
As mentioned earlier, the war in Ukraine and the COVID-19 pandemic had a significant impact, but combined with the drought in some regions and local economic policies, all this contributes to higher prices around the world.
The COVID-19 pandemic, supply chain disruptions and labor shortages have contributed to the rise in prices of commodities such as gas, food, cars and furniture. The war in Ukraine also had an additional impact on oil and gas prices. This is in addition to shrinking wheat production in both Ukraine and Russia.
Rising energy prices affect almost everything, from heating homes to transporting goods to continued production in factories.
According to global commodity market data released by the International Labor Organization last March, wheat and oil prices rose by about 50 percent compared to the previous year. Prices of other grains are also rising.
“For importing countries, price increases represent a significant impediment to economic growth and living conditions, leading to the potential for increased social and economic tensions,” Valentina Stoevska, an expert in the International Labor Organization’s statistics department, wrote in her report.
Is inflation always a negative thing?
The short answer is no, but explaining the reasons is somewhat complicated.
If wages rise at the same rate as inflation, inflation does not have much effect.
But when someone’s wages don’t rise to keep up with the rate of inflation, the value of the money they have goes down.
Of course, this can make life more difficult, as the prices of rent and food suddenly rise, and it is difficult to keep up.
However, inflation can have a positive effect on the economy, as it can lead to an increase in production.
Increasing production can mean that wages are raised and jobs, goods and services are increased, and this in turn can counteract the effects of inflation.
Is there a way to control inflation?
Yes, there is a way, but it is not simple because it is not possible to control all the factors that lead to the high inflation rate.
Among these factors are the global supply chain problems caused by the Covid epidemic and the war against Ukraine.
But in general, central banks, governments, or both can control inflation rates.
Monetary policy includes the adjustment of interest rates, and some economists believe that higher interest rates will reduce the demand for goods and services, which in turn will lead to a slowdown in economic growth and thus inflation.
Finance and economists consider controlling the money supply and raising the income tax as other ways to control inflation rates.
But if you are reading this article at a time when you are finding it very difficult to buy basic commodities whose prices have skyrocketed, it may be too late to control inflation.