Inflation is about politics as much as economics

Yossi Mekelberg

The era of low prices, especially where food and energy are concerned, is evidently well and truly over. Inflation is engulfing the global economy and much of it can be attributed to the impacts of the COVID-19 pandemic, various domestic factors and, more recently, the war in Ukraine.

However, while the economic impact on individual households and people is its more obvious result, inflation is also a catalyst of political instability, which in return further exacerbates economic hardship. After all, inflation instantly affects the well-being of individuals, families and communities, and in many cases deprives them of basic necessities, including food, medical treatment, education and the use of utilities that require energy. Hence, inequalities and deprivation become more apparent and with this comes political malaise.

The war in Ukraine has accelerated already-existing pressures on price stability, as both Russia and Ukraine are significant exporters of essential commodities including oil, coal, gas, wheat, corn, seed oils and fertilizers. The price of essential foods was already increasing globally due to disruptions in the supply chain as a result of two years of the pandemic. The conflict in Ukraine — a country that has a third of the world’s most-fertile soil, according to the UN Food and Agriculture Organization, and whose exports are 45 percent agriculture-related — was bound to adversely affect food security.

A large number of economies in Europe, Central Asia, the Middle East and Africa are almost entirely dependent on Russia and Ukraine for their wheat imports. The longer this war continues — for now, there is no end to it in the offing — and since COVID-19 remains unpredictable, the scarcity of commodities will result in higher prices, leaving vulnerable people finding it increasingly difficult to access them.

Some of the political impacts are immediate, with changing voting patterns and people taking to the streets to protest. Others are long term, with people becoming disenchanted as well as sometimes disenfranchised from the political order altogether. Human rights organizations have warned that, in places such as Libya, Lebanon or Tunisia, where food insecurity is already closely related to political tensions and in some cases instability, this situation could escalate to actual protests and calls for radical political change.

Inflation has reared its head after years of relative price stability in many parts of the world. In simple terms, inflation is a loss of purchasing power over time, meaning that the money in our pockets is constantly losing its value. High inflation mainly benefits those who are better off, while aggravating already-existing inequalities in the distribution of wealth and pushing more people into poverty. In times of prosperity and therefore price stability, many low-income families manage to get by, but they now face being pushed back into poverty as prices rise again and at a faster pace than their income, as well as whatever social safety nets there might be in place to protect them.

Members of the middle class, who are seeing a larger proportion of their income going toward more basic necessities, are forced to use their savings to maintain their standard of living, which leads to resentment, but also unsettles many and leaves them worrying for their future. History tells us that it is traditionally the middle classes who lead challenges to the political order of the day.

The rising cost of living has as much of a psychological face to it as a practical one, as it induces existential fears about whether rent or mortgage payments can be kept up, food can be put on the table and bills be paid. Inevitably, and with great justification, the governing bodies, politicians and those who profit from price hikes are seen as responsible for the hardships caused by the rising cost of living and are held to account for it.

Decades of price stability created certainty and instilled an expectation of that situation continuing indefinitely, but that sense of security is fast disappearing. In Western democratic societies, a growing deep distrust in the establishment and the ruling elites already preceded the current bout of economic instability. That distrust is now reaching breaking point and has already manifested itself in indecisive election results and the rise of populist-nationalist discourses that thrive on discord and division.

There are certain elements of the current economic situation that, on the face of it, spell good news. Inflation and overheated economies are a reflection of demand exceeding supply, meaning employment and wages are on the rise. Moreover, national banks are, in order to cool down the economy, raising interest rates, which makes saving a more attractive proposition than it has been for a long time.

Decades of price stability instilled an expectation of that situation continuing indefinitely, but that sense of security is fast disappearing.

However, for the vast majority of people, especially those on low wages and the unemployed, there is not much to cheer about. Inflation favors the well-off, who have more disposable income and who are better informed about how to protect their assets from rising prices, and can even increase their wealth in such times. The less wealthy, including those who are employed and seeing their wages rise, are entering a losing race in which prices outpace wage increases, while a larger proportion of their income is spent on basic commodities such as food, heating or transport, as these prices can rise faster than the overall rate of inflation.

Moreover, while rising interest rates are good for savers, they hit those with mortgages hard and are usually followed by rent increases. Society’s most vulnerable, such as people in retirement and others who are supported by public funds, are forced to make tough choices about cutting back on the most basic necessities.

Well-contained inflation is a sign of a vibrant and growing economy, but this is not what the world is witnessing now. The pandemic and Russia’s war with Ukraine, which is now deteriorating into a global crisis, are making it likely that a more prolonged period of shortages and price increases is ahead of us. The response will require cooperation and coordination by governments and relevant international organizations in order to identify vulnerabilities across the world and ensure the redistribution of resources to prevent economic hardship turning into social and political discord and upheaval.