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Inflation: A Tale of Two Worlds

Inflation has taken numerous headlines everywhere we see. Whether it is the headlines that we see on the news or the headlines we saw from price stickers in our local grocery store. Prices for everything seem to be going up and up and up. Consumers all over the world are bracing for an era of price increases taking a chuck into their savings and their incomes. Governments and central banks are interested to ease this inflation, looking to increase interest rates, provide subsidies and rebates, cut taxes, and introduce more social programs.


In my home country of Canada, the Bank of Canada has made it clear that they will increase interest rates to quell the flaming inflation that the country is facing. Currently, the policy interest rate is at 1.00%; the Bank of Canada is looking to increase the interest rate to 1.50% in June and perhaps again in the next quarter. This historic change in increasing the policy interest rate at such an amount is due to inflation rocking the country. To give some perspective, in March, the consumer price index (CPI) indicated an increase of 6.7% compared to the previous year. Many families are feeling the brunt of price increases in grocery, fuel, goods, and services. 


Indeed, interest rate increases due to high inflationary pressures are being experienced all over the world, not just in Canada. Centralized banks are looking to cool inflation by using whatever tools they have; the strongest and most common tool is the adjustment of the policy interest rate. Any increase in interest rates will increase overall borrowing costs, interest on loans, increase mortgage payments, increase short-term credit interest, and many other things. The goal is to decrease both the money supply and decrease overall business activity through more strict loan payment agreements.


Just to showcase the power of the policy interest rate, Canadian home prices have fallen 6% in April according to the CBC. After 2 years of unprecedented home price increases in the Canadian housing market, increases in the policy interest rate set by the Bank of Canada have resulted in downward pressure on home prices. When the policy interest rate was reduced to a historic low when Canadian economists recommended that the government promote spending to keep the economy afloat. The result was that monetary relief for individuals, businesses, and whole industries coupled with low-interest rates gave upward pressure on Canadians to buy homes and thus increased the prices of homes.


Although the overall price of homes is still much higher than what was the case before the pandemic. An increase in interest rates has resulted in a reduction in the overall sales and prices of homes in Canada as Canadians realize that the time of low mortgage payments from low interests has come and gone. 


Interestingly, the Bank of Canada (among many other central banks) has come under criticism for not increasing the policy rate after early signs of inflation were already taking hold of the country. However, the Bank of Canada had maintained that the inflation experienced half a year ago was simply "transitory". After this term, the Bank of Canada started using the "transitory but not short-lived" statement to describe the inflation experienced in the country. Unfortunately, the Bank of Canada had not anticipated continued supply chain issues, China's supply chain bottlenecks due to new lockdowns, and of course the Russia-Ukraine War. These three main factors have been attributed to the persistent rise of inflation all over the world. 


So what is next? How long will inflation persist? Will inflation be permanent? Or will stabilization or even deflation occur? In the current economic climate, nobody can say for sure what is to come next. But a few economists and banks have pointed to a possibility of a recession following this unprecedented inflationary period. One of the earliest banks to predict a recession is the Deutsche Bank, which claimed that high inflation, low unemployment, and lagging growth will lead to a recession akin to that of the late 1970s and 1980s.


Others have followed suit in this prediction, ex-chief of Goldman Sachs Lloyd Blankfein has the US of a potential recession coming about in the next year. He cites an approximate 30% chance of a recession occurring largely due to high inflationary pressures on consumers and corporate America. 


However, most of this is merely speculation based on internal analysis that some banks and economists have done. Did anyone predict the inflationary period we are seeing now? Some may have but not to this extent. Perhaps inflation will continue to persist or perhaps the tools that global central banks have will in fact tame inflation to a certain extent. The future is variable, nothing is for certain.


Inflation, Poverty, and the Developing world


Although inflation has especially looked bad in developed countries. The developing world is suffering from inflation even more so. Millions of people in Afghanistan, Syria, and Yemen require more humanitarian aid than ever before. In Afghanistan, the UN reports that nearly 90% of the population is experiencing a shortage of food and over half (24 million people) require humanitarian assistance to survive. Inflationary pressures in Afghanistan have caused prices for "basic goods" to increase at historical levels, according to an interview from Al-Jazeera.


We privileged folks living in developed countries in the comfort of our own homes with AC, all-day electricity, and food that is often kept for so long that it has an expiry date; we need to humbly understand the realities that people in developing countries experience. The suffering that an average Canadian feels from inflation is nothing compared to the average impoverished Indian, Afghanistani, Syrian, or African person experiences when prices go up.


That is not to say that inflation isn't an issue in developed countries, it absolutely is. For instance, Foodbank usage among Canadians has increased by a large margin due to grocery prices increasing. In the UK, the average British household will see an increase of $2900 in bills due to inflation. Clearly, people from all facets of life are experiencing increased financial struggles. However, I am simply stating the reality of what the majority of the developing world experiences, their experience is much worse relatively speaking than any person in Canada or the UK. 


For the readers, save some money by walking instead of driving your car for trips under 2 kilometres, try discount or bulk grocery stores to save on some premium costs, and donate to a humanitarian aid organization like the UN to help those that are especially in need. There are always some things - no matter how small - that we can do to help ourselves and our fellow kin.


 





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