Inflation & Global Growth


The global economy will expand more slowly than predicted three months ago and higher commodity prices and an escalation in the Russia-Ukraine war could prompt another downgrade. The performance of the world’s major economies is likely to be weaker than anticipated. Clearly, inflation is rising and the prospect of a “cost of living crisis” looms for many people across the world.
Inflation in most countries has soared to multi-year highs, driven by a rebound in economic activity and a further straining of rampant supply chain disruptions. While economists were expecting inflation to moderate this year with signs of supply shocks easing, Russia’s invasion of Ukraine and recent lockdowns induced by a resurgence in Covid-19 cases in parts of China, a major manufacturer, have derailed much of that optimism. Food and energy prices have hit record highs following a spike in inflation. Here in Pakistan inflation measured through the Sensitive Price Index (SPI) increased 0.49 per cent during the week ended on May 12 owing to a rise in the prices of essential food items. This increase in weekly prices was noted for the past three consecutive weeks. Data showed that the prices of 28 essential food items increased during the week under review compared to the previous week. The price of wheat flour increased by 41.78pc, chicken 12.13pc, potatoes 7.04pc, eggs 5.08pc, pulse masoor 4.79pc, onions 4.74pc, pulse gram 2.29pc, pulse mash 2.05pc, mustard oil 1.97pc, mutton 1.64pc, and tea prepared 1.16pc, respectively.
In the non-food items the price of cigarettes increased by 2.62pc and match box 1.31pc, respectively. On the other hand, the prices of four items declined during the week, including tomatoes 12.01pc, bananas 5.87pc, firewood 0.43pc, sugar 0.15pc and LPG 0.11pc. The SPI increased by 0.94pc for the lowest income group (below Rs17,732 per month) and by 0.41pc for the group with a monthly income of above Rs44,175.
The current spike in inflation is historical, although it won’t last at these levels for much longer. It has been provoked by the extraordinary demand for goods in 2021 as countries emerged from lockdowns, shops opened and people were able to go out and buy stuff with money saved during weeks of economic inactivity. We got this extraordinary surge in demand for goods and that has pushed off inflation, because we did actually also see an extraordinary surge in supply of goods. But the demand for goods was so unusual it overwhelmed the supply and when demand is greater than supply, you either get shortages or you get price increases. What we had was a mixture of both, but some of that surge in demand pushed up prices. Now, that started to fade because, of course, by the end of last year in a number of countries, consumers’ stock of savings had disappeared so the demand was coming down.
We’ve still got some of that inflation pressure there but it’s on its way out. If you look, for example, at television prices in the US or elsewhere, they were rising last year and are now falling, they’ve now actually got negative inflation. So we’ve started to see a correction, but there’s still enough of its lingering effects that adding to inflation.