Australia’s cost of living crisis is in the news every week. Prices have risen 6% in the last year, and we’re told things will get worse before they get better.
Many of the causes are global, and the effects are global too. In fact, Australia’s inflation (price growth) is lower than the global average. What’s driving this global problem, and how are governments responding?
The headline numbers
The latest yearly inflation numbers from around the world show how widespread the problem is, and how Australia’s experience is relatively mild.
First, what’s behind it?
War in Ukraine
Ukraine and Russia are major exporters of essential goods. Russia is one of the world’s top oil and gas exporters, and Ukraine is one of the top five wheat exporters. The war has reduced supply for these goods, driving up the global price.
Supply chain disruptions
The fragile transport system that underpins global trade did not cope with COVID-related disruptions. The result was major shipping bottlenecks and delays. These are now easing, but have already contributed to higher prices. China’s ongoing zero COVID policy continues to disrupt its exports to the world.
Extreme weather events have reduced agricultural production. For example, hot and dry conditions in Europe, India, and the U.S. have damaged a range of crops.
Many governments gave economic support to their populations during the pandemic. If this money was poorly targeted, it could have pushed up prices. Some economists believe this happened in the U.S.
Like Australia, many countries have experienced rising house prices over several years.
A notable feature of global inflation is that it is worst for essential goods, especially food and fuel. This will hit the world’s poorest people the hardest, since people with the least money tend to spend the highest share of their money on essentials.
In many countries, this is resulting in a severe spike in malnutrition. In Sri Lanka, shortages of food, fuel, and medicines sparked widespread protests that led to the removal of the country’s President and Prime Minister.
Why is it so bad in some countries?
When a country has inflation in double or even triple digits, it’s usually because of a longer-term economic crisis.
This is true in Zimbabwe, Venezuela, Sudan, Lebanon, and Argentina, where persistent high inflation has pushed many people into poverty. Short-term global pressures are making a bad problem worse in these countries.
In Turkey, high inflation is fairly new, and economists say it’s caused by the President’s refusal to raise interest rates in the face of global pressures.
What can governments do about it?
Raise interest rates
Interest rates are one of the most common tools to fight inflation. They make it more expensive to borrow, which tends to reduce spending. Dozens of countries have raised interest rates.
Give people money
Many countries have opted to increase welfare, give out cash, or provide other financial help. The U.S. has cancelled some student debt, and welfare has increased in many countries including Brazil, Indonesia, and Saudi Arabia.
Reduce prices directly
Governments can reduce the price of things they tax heavily or sell themselves. Transport fares have been eased in Germany, and many European countries will subsidise energy bills.
The UN and some economists have called for temporary taxes on energy companies profiting from higher prices. Few countries have adopted this, although the UK introduced a small tax.
Some countries, including India, have tried to limit exports of essentials.