Global inflation has common factors, but the antidote varies with the peculiarity of each country

Besides the pandemicanother global problem that countries have had to deal with in recent years has been the soaring inflation. Even with common causes, specific characteristics of each nation ended up influencing the intensity of the rise in prices and also the tools to combat it.

In 2021, it was possible to notice these discrepancies considering only the countries that are part of the G20. Inflation rates range from around 50% in the case of Argentina to 0.5% in Japan, with a series of different results in each country.

In the case of Brazil, inflation was above average, around 10%, with internal factors that worsened the situation. At the same time, the country currently has one of the largest interest rates in the world, indicating the intensity and speed in the fight against inflation.

common causes

Simão Silber, a professor at FEA-USP, says that the common cause for the inflationary pressures registered around the world is the Covid-19 pandemic itself, which from 2020 onwards generated a mismatch between demand and supply of a series of goods, raising prices .

The scenario with the health crisis generated what Margarida Gutierrez, a professor at UFRJ, summarizes as four shocks.

The first two were, according to her, simultaneous, one of demand —in which income spent on services and travel migrated to the consumption of goods, causing prices to rise— and another of costwith the prices of commoditiesespecially food and Petroleumtriggered by the imbalance between supply and demand.

The third shock arose from the adoption by several countries of fiscal and monetary stimulus during the pandemic, which resulted in an “inflationary excess”, with increased liquidity, financial aid and low interest rates. For her, however, this factor reached many more developed countries, in the case of U.Sthan Brazil.

The last shock that the teacher cites was partially linked to the pandemic: that of energy prices. In this case, the reasons varied from country to country, but the most common was the rise in oil, with demand high amid the recovery of the economy and supply contained by the reduction in production by the Organization of Petroleum Exporting Countries (OPEC).

At Europe, gas prices advanced on the back of growing Chinese demand, lower supply and, according to authorities, a hold on supply by Russia. In the United States and the United Kingdom, both natural gas and oil rose, following the trend abroad.

In India and Chinathe most damaging rise was that of coal, with lower production and Chinese restrictions on consumption and production for environmental reasons.

And there is still the case of Brazil, where fuels skyrocketed because of oil, at the same time that electricity bills became more expensive for the water crisisharming the production of energy by hydroelectric plants and forcing the use of more expensive thermoelectric plants.

Silber also highlights that the pandemic, with the need to lockdowns, affected the production of industries and the transport of inputs and products. When the economy started to recover, production did not keep up with the accelerated demand.

This led to a lack of inputs such as chips, essential in the production of electronics and automobiles. Higher prices, says Gutierrez, hit mainly durable goods.

In addition to the pandemic, there is now a new common inflationary cause, the war between Ukraine and Russia. “Supply chains were recovering more slowly, and the war broke out again. There are new disorganizations due to sanctions”, says the UFRJ professor.

The USP professor says that the main inflationary factor linked to the war comes from the rise in commodities, since Russia and Ukraine are major producers in areas such as grains and ores.

The main problem is that the price of these products was already high by the pandemic, and the new levels become even more harmful. As the value of commodities anywhere in the world follows the international market, the rise has a global effect.

Specificities

Even so, specific factors make inflation in Argentina or Brazil different from that of the United Kingdom or Japan – whether due to elements of these countries’ own economy, or due to specific events during the years of the pandemic.

In the case of Brazil, Silber cites especially the large exchange rate devaluation, with the dollar rising and making imported products like oil more expensive, and the water crisis, with the effect on electricity bills that harmed both the population and companies.

These two elements, however, are no longer concerns, in the teacher’s assessment. The dollar entered a downward trend against the real and is already around R$ 5, while the good volume of rain in early 2022 removed fears about the crisis.

For this year, he considers that the greatest inflationary pressures should come from the fuel adjustments made by Petrobraspossible uncertainties caused by the elections and the tendency to increase the export of grains and ores due to the high price abroad, reducing domestic supply and making products more expensive.

Gutierrez says that differences between countries may also be linked to the degree of spread of inflation. At euro zone, it still focuses on energy and food, outside the so-called “core”, indicating that prices could decrease if the cause for these highs ceases. It is this justification that the European Central Bank (ECB) uses to not raise interest rates.

In the United States, the spread of inflation is more evident, with a heated job market, high wages and the effects of robust government aid during the pandemic.

There is also the case of China, which registered a record producer inflation of almost 9%, but with no impact on consumer inflation, around 0.9%.

For Gutierrez, this is linked to the peculiarities of the Chinese economy, with a large number of state-owned companies able to insure these higher costs and avoid pass-throughs.

Silber also cites low demand among consumers, as well as a housing bubble and stock market speculation that curbed inflation. Low demand is a common scenario for many countries in the Asiawhich according to the professor led to lower inflations.

Among the G20, Brazil had the third highest inflation in 2021, behind the Argentina (50.9%) and Turkey (36.08%). In both cases, says the professor, the causes for above-average inflation come from pre-pandemic inflationary processes and an outflow of foreign capital during the pandemic, in the case of Argentina due to the soaring foreign debt and, in Turkey, due to government interference in the central bank.

And even though inflation in Europe, at around 5%, may seem small for countries like Brazil, Silber points out that the numbers are “significant, even if smaller”, since these nations traditionally work with lower targets, of 2% , and the entire population plans itself financially with that level of inflation in mind.

Combating Inflation

If the causes of inflation may differ, the fight against it, in general, has a common and hegemonic tool – the rise in interest rates.

“When there is cost inflation, interest rates should not rise, but when cost inflation spreads through the economy, it generates secondary shocks, then you have to intervene, if it doesn’t go up and there’s no limit”, says Gutierrez.

The divergence between countries is precisely this identification, which determines when the bull cycle begins. In Brazil, it started in March 2021, while in the United States, in March 2022, and in December 2021 in United Kingdom. In the eurozone, it has not yet occurred.

According to the professor, the decision to start raising interest rates depends on the context of each country.

“In the US, there is no doubt that there are secondary effects, the economy is growing a lot, it has become typical demand inflation with a heated job market and rising wages”, says Gutierrez. “In the others, it goes from case to case. In Europe, demand is still very depressed, it is not at its pre-pandemic pace, so interest rates have not started to rise.”

Silver assesses that the beginning of the cycle in Brazil occurred early, due to the history of “uncontrolled inflation”. “We always have this fear, and then we fight more”.

Today, interest rates in the country are the second largest in real termsand the fourth in nominal terms.

For Silber, the great exception in this scenario is China, which has cut interest for identifying a need to stimulate the economy.

Teachers also mention that there are other monetary policies to deal with inflationsuch as the cut in the purchase of bonds —already underway in the United States and Europe— to reduce the circulation of money in the economy, but, in general, ineffective.

And there are cases like Argentina, which chose to freeze prices to try to contain inflation, something historically inefficient.

“Before, the interpretation was that interest rates did not need to be raised because the causes were temporary, of the pandemic, and would fall on their own. This did not happen, on the contrary. And then the war came, so it spread more difficulties, and it will influence the decisions of central banks”, says Silber.