Inflation and Russo-Ukrainian War
We hear the word "inflation" frequently around us in news, conversation, and reports concerning the current economic status, especially in relation to the ongoing Russo-Ukrainian War. As inflation affects all aspects of the economy, from our daily spending, business investment, and employment rates to governmental programs and tax policies, it is important for a global mind to understand this economic phenomenon. This article, therefore, aims to explain to students the cause of the inflation, its current status worldwide, and solutions suggested by various experts. Then, at last, we will be able to make a clear and sensible line of connection between the global economy and your parent's angry murmur while looking at their market receipts.
Inflation: What is it?
Inflation can be simply defined as the sustained increase in the overall prices in the economy. The root of inflation can be categorized into three types.
One, demand-pull inflation. This type of inflation tends to occur when an increase in the supply of money and credit stimulates the consumer's overall demand on various goods and services, even beyond the extent of society's limitation of resources and production capacity. For instance, let's say a new limited edition of Jordan sneakers is released, with the original price of $250. But in consequence, due to the excessive demand beyond its production capacity, the price of the sneakers will increase endlessly.
Two, cost-push inflation. This phenomenon occurs when the total supply within the economy decreases substantially, often due to the rise of cost of production. However, the total demand for goods and services are at rest, eventually imposing upward pressure on prices.
Lastly, built-in inflation. This type of inflation refers to the general anticipation of the consumers that the current inflation rate will rise at the same rate in the future. Its adaptive expectation on the future economy leads to worker's demand for higher income, in order to cope up with the increasing price of goods and services, which then also leads to the higher cost of goods and services (demand-pull inflation).
Macroeconomic measures for inflation
There are a few macroeconomic metrics used to measure inflation.
The most widely used one is Consumer Price Index (CPI), which measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Producer Price Index (PPI), in contrast, measures the price change in the economy in the perspective of sellers.
Also, there are two things to keep in mind while observing the inflation.
One, inflation rate. Inflation rate means the percent change in prices over a specific time period. The higher the inflation rate, the greater the overall prices in the economy becomes. This implies that an overall rise in prices over time erodes the purchasing powers of consumers, since a fixed amount of money will afford progressively less consumption.
Two, Price Indices. These are the index numbers assigned to each year in order to show the relative change of prices to a specific base year. These two indicators help us to measure inflation.
Russo-Ukrainian War and Economic Crisis
On February 24, the Russian army invaded Ukraine in order to overthrow the democratically-elected Zelensky government and replace it with a Russian puppet government. This resulted in certain disastrous consequences: food inflation, global inflation, and energy crisis worldwide.
Prior to the war, Russia and Ukraine's economy played a huge role in the world grain market, accounting for 13% of the world wheat market and 17% of the corn export market combined. However, after the war broke out, wheat and corn in Ukraine and Russia were unable to reach the international market, which led to a substantial shortage of grains worldwide and eventually a drastic increase in their prices. This is an example of cost-pull inflation, the shortage of supply of goods and services relative to the total demand.
Additionally, oil prices were rising globally even prior to the full escalation of the war. However, when Russia attacked Ukraine, the price of crude oil in the global market skyrocketed from around $76 per barrel to over $110 per barrel. When oil prices go up all modes of transportation, whether sea land or air primarily see transportation that is freight rates are going up rapidly
The energy crisis in Europe arrived with the Russo-Ukrainian War. The fundamental reason for the current explosion in gas prices in the EU is Russia's purposeful curtailment of gas supply. This has influenced the cost of energy generated by gas-fired power plants as well as total electricity pricing.
In contrast to the inflation caused by the pandemic, which was recovered in two quarters, the U.S. Federal Reserve's excessive interest rate cuts, quantitative easing, and the U.S. government's spending on welfare allowance have also contributed to the 2022 Global inflation.
Inflation in the US
Let's look at the situation in the US. Between November 2020 and November 2021 in the US, price rises for housing, food, and fuel contributed to a 6.8% increase in the Consumer Price Index. Inflation increased further in 2022 due to higher energy costs, hitting 9.1%, the highest level since 1981. The Federal Reserve raised interest rates for the third time in a year in July 2022, but inflation remained strong and was exceeding wage growth. The inflation also played a major role in President Biden's sharp drop of approval rate - now 31%, lower than his predecessor, Donald Trump. President Biden may think about rescuing Ukraine if he really wanted to get out of his political rut.
Inflation in Europe
Biden and the US are not alone facing an economic crisis. The situation in Europe is becoming worse and worse. With energy costs up over 42% and food prices up over 9%, overall inflation in the EU is 9.6%. While Russia keeps the continent hostage over energy supply, this is likely to soar to extremely high levels. However, it could show that inflation isn't always the worst of it. Because if Russia's crippling of Ukraine is to blame for inflation, then the worldwide recession that is being feared is also due to Russia's actions as well as our botched reaction to the invasion.
In the last five months, it has become blindingly obvious how vitally important Ukraine is to the world economy. Most people would not have been able to locate Ukraine on a map, despite it being possibly the most strategically significant nation in the world. Now, we are putting our own lives in grave risk by failing to save the unquestionably most vital country in the whole world. Before we decide to genuinely, truly help Ukraine, the rest of the world will not be able to resolve its economic problems and the political ramifications that follow.
What should be done to control it?
Let's recap the definition of inflation. It is the sustained increase in the overall prices in the economy. It happens when the excessive supply of money occurs or when the total supply within the economy decreases substantially. Therefore, monetary authorities try to push recession by increasing the base interest of the central bank, reducing consumption to reduce inflation. As the base interest rate rises, propensity appears such that consumers and businesses start to deposit their money rather than taking out a loan. As the demand of the consumer decreases, prices decrease naturally. This eventually leads to market stability.
However, just increasing the interest rate bears a lot of risk including high exchange rates, downturn of the economy, and most importantly, recession and a rise of unemployment. Thus, it is an immense responsibility of the monetary authorities to minimize such risks and bring back economic stability to the society.