Hit us with a “tax on the poor”
Rice and wheat crops will not replenish depleted stocks
A “tsunami of hunger” has arrived.
Globally, people are experiencing inflation at levels not seen in decades as the prices of essential goods such as food, heat, transport and housing have risen. And while inflation may have peaked, its effects could be getting worse.
How did we get here? In two words: pandemic and war. A long, comfortable period of low inflation and low interest rates came to an abrupt end following the impact of COVID-19, as governments and central banks kept shut-in businesses and households afloat with trillions of dollars of support. This lifeline has kept workers from lining up for benefits, businesses from going bankrupt, and house prices from plummeting. But it has also shifted supply and demand like never before.
In 2021, when pandemic-related restrictions lifted and the global economy grew at its fastest pace since the 1980s recession, all that stimulus money flooded the global trading system. Factories have failed to expand fast enough to meet demand, COVID safety regulations have caused labor shortages in retail, transportation and healthcare, and the booming recovery has sent energy prices soaring.
If that weren’t enough, Russia has invaded Ukraine and Western sanctions against the major oil and gas exporter have raised fuel prices even more.
Known as the “tax on the poor” because it hits low-income people hardest, double-digit inflation has exacerbated global inequalities. While the wealthiest consumers can count on savings, others are struggling to make ends meet.
As winter approaches in the Northern Hemisphere, cost-of-living pressures will intensify as fuel bills rise. Workers have taken strike action in industries ranging from healthcare to aviation, demanding that wages keep pace with inflation.
Concerns about the cost of living dominate the politics of rich nations, in some cases overriding other priorities, such as action on climate change. While recent drops in gasoline prices have eased some of the pressure, inflation remains a major target for US President Joe Biden’s administration.
France’s Emmanuel Macron and Germany’s Olaf Scholz are ramping up their budgets to funnel billions of euros into support programs.
But if things go wrong in industrialized economies, skyrocketing food prices are exacerbating poverty and suffering in the poorest countries, from Haiti to Sudan and from Lebanon to Sri Lanka. The World Food Program estimates that another 70 million people around the world have been pushed to the brink of starvation since the start of the war in Ukraine, which it calls a “tsunami of famine”.
The war in Ukraine and high energy costs will limit global agricultural production in 2023. Production of staple foods such as rice and wheat is unlikely to replenish depleted supplies, at least in the first half of 2023.
Central banks around the world have moved to drastically raise interest rates to cool demand and tame inflation. By the end of 2023, the International Monetary Fund expects global inflation to fall to 4.7%, just under half its current level. The goal is a “soft landing” in which cooling occurs without housing market crashes, corporate bankruptcies or rising unemployment. But such an optimal scenario has proved elusive in past high-inflation bouts.
From US Federal Reserve chief Jerome Powell to Christine Lagarde of the European Central Bank, there is increasing talk that the medicine to raise interest rates may taste sour. The IMF’s regular October forecast was one of the bleakest in years, stating, “In short, the worst is yet to come, and for many people, 2023 will look like a recession.”
