Unless govts act, rising cost of living will exact a heavy price

There is no escape from the fact that after a prolonged period when price stability was one of the characteristics of the global economy, we have entered a new and volatile era of high inflation and a possible economic slowdown.

Due to the unique set of circumstances that is driving this rise in living costs, it is reasonable to expect that it will remain a major characteristic of the world’s economies for the foreseeable future.

Ominously, 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 it 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 is affecting the supply chain.

All segments of global society are feeling the pinch as a result of the rising cost of living but it hits hardest those who are already worse off, both in 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 dealt with quickly, this crisis will lead not only to human suffering and loss of potential but could also result in social unrest and even social revolution. There are obvious and tangible hardships that are associated with unchecked price increases but rampant inflation leaves psychological scars, too, as a result of the uncertainties it creates and, with them, widespread and chronic anxieties for individuals, families and businesses, too.

In the more than two-and-a-half years since the world was hit by an unprecedented pandemic, some of the suppositions of global economic stability have been thrown out of the window. Governments with conservative instincts have poured billions of whatever currency they use into their economies to prevent a total collapse, and then into COVID-19 testing and vaccination programs, and rightly so. For the poorer countries this was not even an option, and many have suffered not only human but also economic losses as a result of stalled manufacturing, trade and tourism activities, without the social safety nets and benefits for their citizens that are enjoyed in wealthy countries.

The rise in energy prices had accelerated inflation in many countries even before Russia’s invasion of Ukraine, and it has further intensified since the conflict began in February, resulting in huge uncertainty over gas and food supplies to Europe and causing prices of goods and services to spiral out of control.

This episode of inflation is not a sign of economies overheating; rather, it is more a result of shortages created by unusual conditions, with a real fear that it could lead to stagflation — a most harmful mix of stagnating growth and inflation caused by pressures on the supply side.

Inflation was once described as the cruelest tax of all, as it disproportionately affects the poor. Global polling by World Bank and International Monetary Fund researchers has found that individuals who identify as very poor have a 10.5 percent higher probability of naming inflation as a top concern than those who identify as rich, as it almost instantly reduces their quality of life.

To begin with, those who are worse off economically have to spend a bigger proportion of their income on basic commodities such as food and energy, which leaves them more vulnerable to price hikes.

In addition, those who are more affluent are better equipped to protect themselves from inflation as they hold diverse assets, and in times of austerity they can tap into their savings until the dark clouds of hardship have passed. This privilege is not afforded to those who live from day to day and who struggle at the best of times to provide for themselves and their families.

Social safety nets and benefits are more generous in some countries than in others but inflation erodes their value. Worse, if the forecast stagnation materializes it is likely to be followed by tighter fiscal policies which, once again, hurt the poor and lower-middle classes who rely more heavily on public services, including for education and health, and even on subsidized food or programs that facilitate economic and social mobility.

There is no expectation that the global economy is going to emerge from this inflationary crisis any time soon, as the COVID-19 pandemic is far from over and new variants might create further economic pressures. Meanwhile there is no end in sight to the war in Ukraine.

The IMF predicts that the next two years are going to be tough, with a genuine risk of a full-blown recession. In the midst of these crises, the issue of climate change has been pushed to the margins 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, are hurting the most vulnerable in our societies.

If governments and international organizations cannot, or will not, rise to the challenge presented by the gap between the rising cost of living and lagging incomes, it increases the risk of social unrest, especially in countries that suffer from worsening and inadequate governance.

According to the Verisk-Maplecroft Civil Unrest Index, the combination of rising prices and government cutbacks has already prompted growing levels of civil unrest across key emerging economies. This might create a snowball effect of political instability, which hurts investor confidence and in turn creates even worse economic conditions.

In light of the very particular circumstances and causes of the current rise in the cost of living, and because inflation is at its highest level for decades, it is incumbent upon governments to take urgent and coordinated action to contain it.

Tightening monetary policies through sharp increases in interest rates was expected but this also runs the risk of throwing countries deep into recession, as it increases the cost of borrowing and housing, which might end up pushing many more millions of people below the poverty line while also making them homeless.

Hence, both monetary and fiscal policies should be implemented with sensitivity by applying mechanisms to protect those these measures might hurt the most. Moves to contain inflation should avoid hurting people who are already struggling to survive and must not compromise the future of the younger generation. Otherwise, prices might stop rising but the long-term social costs will be immeasurably horrendous.

• Yossi Mekelberg is professor of international relations and an associate fellow of the MENA Program at Chatham House. He is a regular contributor to the international written and electronic media. Twitter: @YMekelberg