High electricity costs and supply chain disruptions fuel global inflation
BUDAPEST, Hungary — From appliance stores in the United States to food markets in Hungary and gas stations in Poland, rising consumer prices fueled by high energy costs and supply chain disruptions supply is straining households and businesses around the world.
Rising inflation drives up the prices of food, gasoline and other commodities, and causes many people to choose between digging deeper into their pockets or tightening their belts. In developing economies, this is particularly serious.
“We have noticed that we are consuming less,” said Gabor Pardi, a shopper at an outdoor food market in the Hungarian capital, Budapest, after recently buying a bag of fresh vegetables. “We try to buy the cheapest and most economical products, even if they don’t look so good. “
Almost two years after the start of the Covid-19 pandemic, the economic impact of the crisis is still being felt even after countries have rushed out of debilitating lockdowns and consumer demand rebounded. To make matters worse, a new wave of infections is causing further restrictions in Europe and other parts of the world.
The repercussions are hitting Central and Eastern Europe particularly hard, where countries have some of the highest inflation rates in the EU27 and people struggle to buy food or fill their fuel tanks. .
Budapest food market butcher, Ildiko Vardos Serfozo, said it has seen a drop in business as customers move to multinational grocery chains that can offer discounts by buying in bulk at wholesale.
“Buyers are price sensitive and therefore often leave us out, even though our products are of high quality. Money talks, ”she said. “We notice that inflation is not good for us…. I’m just glad my kids don’t want to continue this family business, I don’t see much of a future.
In neighboring Poland, Barbara Grotowska, a 71-year-old retiree, told a discount supermarket in the capital Warsaw that she had been hit hardest by her garbage collection costs which nearly tripled to 88 zlotys ($ 21 ). She also lamented that the cooking oil she uses has increased by a third of its price, to 10 zlotys ($ 2.40).
“It’s a real difference,” she said.
The recent upturn in inflation has surprised business leaders and economists around the world.
In the spring of 2020, the coronavirus crushed the global economy: governments ordered shutdowns, businesses closed or reduced hours, and families stayed at home. Companies have prepared for the worst, canceling orders and postponing investments.
In an attempt to avert an economic catastrophe, rich countries, especially the United States, introduced trillions of dollars in government aid, an economic mobilization on a scale unprecedented since World War II. Central banks have also cut interest rates in an attempt to revive economic activity.
But these efforts to revive economies had unintended consequences: as consumers felt more emboldened to spend the money they had received through government aid or low-interest borrowing, and vaccine deployments have encouraged people to return to restaurants, bars and shops, soaring demand has tested providers’ ability to keep pace.
Ports and freight stations were suddenly clogged with shipments, and prices began to rise as global supply chains seized up, especially as new outbreaks of Covid-19 have occasionally closed factories and ports in Asia.
The price increase has been dramatic. Inflation in the United States jumped to 6.2% in October, the highest since 1990, and the International Monetary Fund predicts that global consumer prices will rise 4.3% this year, the largest increase since 2011.
It is most pronounced in the developing economies of Central and Eastern Europe, with the highest annual rates recorded in Lithuania (8.2%), Estonia (6.8%) and Hungary (6.6%). ). In Poland, one of the fastest growing European economies, inflation hit 6.4% in October, the highest rate in two decades.
Several buyers at a vegetable stand in Warsaw said they were worried about rising prices for staples like bread and cooking oil and expect the situation to worsen during the new year, when energy prices are expected to rise.
Piotr Molak, a 44-year-old vegetable seller, said he has not yet had to raise the prices of the potatoes, apples or carrots he sells but the cherry tomatoes he imports from Spain and Italy, which he buys in euros, have gone far more expensive as the Polish currency, the zloty, has weakened.
“We will mainly feel this in the New Year when the electricity increases,” Molak said. “We’re really going to feel it when we have to spend more on our house than on pleasure.”
Weakening currencies in Central and Eastern Europe against the US dollar and the euro push up the price of imports and fuel and worsen the squeeze on supply reserves and other factors.
The Hungarian currency, the forint, has lost around 16% of its value against the dollar over the past six months and slipped to an all-time low against the euro last week. This is part of a strategy by the Hungarian central bank to keep the country competitive and attract foreign companies looking for cheap labor, said Zsolt Balassi, portfolio manager at Hold Asset. Management in Budapest.
But the prices of imported products have skyrocketed and global oil prices pegged in US dollars have pushed fuel costs to record highs.
“As the Hungarian forint, and indeed all regional currencies, weaken more or less constantly, this will constantly increase the prices of oil in our currencies,” Balassi said.
In response to record fuel prices, which this month peaked at 506 forints ($ 1.59) for gasoline and 512 forints ($ 1.61) for diesel per liter, the Hungarian government has announced a cap of 480 forints ($ 1.50) at gas stations.
While providing some relief, the upcoming elections in Hungary, in which the right-wing ruling party faces the most serious challenge since being elected in 2010, have likely been a factor, Balassi said.
“It’s obviously a political decision that has huge economic downsides, but it probably makes households happy,” he said.
The political nature of some economic decisions is not limited to Hungary.
Poland’s central bank, also facing a weakening currency, has been accused by critics of allowing inflation to rise too high for too long to encourage economic growth and bolster support for the ruling party.
The bank surprised markets with the timing and scale of two base interest rate hikes in October and November in an attempt to ease prices, while Hungary’s central bank increased rates in more installments. small six times this year.
Yet if central banks act too aggressively too soon to control inflation, it could bypass economic recovery, said Carmen Reinhart, chief economist at the World Bank.
She is concerned about rising food prices which primarily affect the poor in developing countries, where a disproportionate share of family budgets is spent keeping food on the table.
“Food prices are a barometer of social unrest,” said Reinhart, noting that the Arab Spring uprisings that began in 2010 were caused in part by rising food prices.
Anna Andrzejczak, 41, who works for an environmental foundation in Poland, was still a child when communism ended there in 1989 and has only vague memories of hyperinflation and the other economic “turmoils” that accompanied it. the transition to a market economy.
But she feels the prices are going up “every time I fill my tank”, with fuel costs having risen by about 35% in the past year.
“We’ve had a period of stability in recent years, so this inflation is now a big shock,” Andrzejczak said. “We don’t have the price increases we had then, but I think it will cause a lot of stress. “
Image courtesy of AP / Laszlo Balogh