Inflation rates continue to remain high in many countries. However, some are beginning to see a slowdown in the growth of consumer prices.
• Inflation is still at record-high levels for many countries.
• Real risk of many countries entering an economic recession.
• The war in Ukraine has caused spikes in food and fuel prices.
• Argentina and Turkey are experiencing the highest inflation in the G20.
• Argentina’s persistent inflation problems are getting worse.
• Russian inflation has doubled since its invasion of Ukraine, but is falling.
• Germany, Italy and the UK are slowly curbing rising prices.
• Poor economies, the import reliant and economically mismanaged, are at higher risk.
• Effective interest rate rises and market-accepted government policies are the resolution.
Global pressures are causing rising prices
Russia’s invasion of Ukraine has had a direct impact on global price levels. The cost of food and fuel have notably risen as Russia is a leading exporter of oil and gas and both Ukraine and Russia account for large quantities in the trade of certain foods, particularly grains, as well as iron. The reduction in production and trade of these goods drives price levels upwards. This has happened as it has been physically impossible to produce the same volume of products in a war zone. Also, Western sanctions on Russia have effectively reduced supply to those countries.
These price rises also have knock-on effects in other industries. For example, rising fuel costs impact the logistics industry as companies have higher transportation costs. Food companies that use grains in their ingredients must either absorb the price hike in the grain or pass it on to consumers. These could be restaurateurs, supermarkets or individuals themselves.
Covid-19-related lockdowns in China, the world’s largest goods exporter, also impacted prices. Lockdowns have caused production levels to fall, driving up prices. Although these lockdowns have had an impact on a global scale, the countries that rely heavily on Chinese importers have been most affected. Sri Lanka, which is on the verge of economic collapse, gets almost one-quarter of its total goods imports from China, and it is not alone in recording such figures. It should be noted, however, that in Sri Lanka’s case, high inflation is only one component of the country’s downfall, with economic mismanagement the primary perpetrator.
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Additionally, supply chain issues – the ability to get goods from production to consumption – still linger. Not only do these directly impact inflation, but they are also directly impacted by inflation. A vicious cycle.
Which G20 countries have the highest inflation rates?
Argentina and Turkey are currently experiencing the highest inflation rates in the G20. In January 2023, Turkey’s rate was 57.7%. This means that goods costing 100 Turkish lira (Tl) in January 2022 would now cost Tl157.7. This was the third straight month in which its rate has fallen, however, which is a positive sign, although Turkey’s rate is still significantly higher than other G20 nations. Health, hospitality, food and furnishings were the main drivers of overall consumer price growth in January 2023.
The recent slowdown ends the largest growth in inflation experienced by any G20 country. Turkey’s inflation rate gained more than 60 percentage points inside 12 months between September 2021 and September 2022. The lira is also in freefall against the US dollar. One lira is worth $0.053 (as of 15 February, 2023), almost one-third of the value it was around the same period in 2021 and one-fifth of the rate in 2017. President Recep Tayyip Erdoğan’s decision to cut interest rates is not helping inflationary pressures.
Argentina’s persistent hyperinflation is on an upward spiral. Prices in January 2023 were 98.8% higher than January 2022. It is now the country with the highest inflation rate in the G20 by some margin. Argentina has been battling inflationary problems for several years. Covid-19 saw inflation escalate to 50% in 2019, but the country was experiencing 40% inflation in 2016. Its central bank has raised its benchmark interest rate to 75% in a bid to control the situation. The fact the interest rate has reached such levels tells its own story about the country’s economic woes.
Russia has seen its inflation rate more than double since its invasion of Ukraine. According to its national statistics office, inflation peaked at 17.3% in April 2022 but has since been falling. In January 2023, its inflation rate was 11.8%. The Russian central bank decided to cut interest rates in September, stating that consumer price growth rates remain moderate. It expects Russia’s inflation rate to return to its target (4%) in 2024. This will depend heavily on the outcome of the conflict in Ukraine. Volatility in fruit and vegetable prices as well as the weakening of the ruble in late 2022 are key factors in its most recent consumer price index (CPI). Russia’s inflation rate is now more comparable with some of western Europe’s heavyweights.
Germany, Italy and UK are slowly curbing inflation
Inflation in the UK is at its highest level in 40 years. In January 2023, the country’s inflation rate was 10.1%. However, this was the third month in a row it has slowed. Yet alcohol and tobacco prices continue to rise. The Bank of England expects inflation to continue to fall in 2023. Falling wholesale energy prices, declining imported goods costs and a tightening of UK household expenditure will lower overall price levels.
Germany's January 2023 figures show its CPI increased slightly to 8.7% (having been 8.6% in December 2022). The country had experienced its highest rate (10.4% in October 2022) since German reunification. Energy prices were 43% higher in October 2022 compared with October 2021. Chancellor Olaf Scholz announced plans for an energy relief package worth between €150bn and €200bn to try to bring down prices. Entering a recession in the coming months is a real possibility for the EU’s largest economy, which contracted by -0.2% (real GDP) in the final quarter of 2022 compared with the third quarter.
Another advanced western European economy hitting double-digit inflation is Italy. Year-on-year inflation peaked in October 2022 at 11.9%. Since then, it has fallen. In January 2023, Italy’s CPI was 10.1%. The slowdown of the annual inflation rate was mainly due to the prices of regulated energy products (from 70.2% to -10.9%) and, to a lesser extent, of non-regulated energy products, unprocessed food and services related to recreation. On the contrary, an upward contribution to the inflation rate came from the prices of processed food including alcohol (from 14.9% to 15.2%), non-durable goods (from 6.1% to 6.8%) and of housing (from 2.1% to 3.2%).
Italy and the UK have the highest interest rates of any advanced economy in the G20.
Inflation falling in the US
Inflation in the US is on a downward trajectory. US inflation peaked in June 2022 (9.1%). Since then, it has slowed in each subsequent month. We now see signs of the US on the downward path of its shoehorn inflation curve. The drop comes after the Federal Reserve (Fed) increased interest rates from 4.25%-4.5% to 4.5%-4.75% in February 2023. This is its eighth hike since the Fed began raising rates in March 2022, when its rate was 0%-0.25%. The Fed wants to return inflation to its 2% target. Inflation in the US is being driven by the increased cost of housing, food and medical care.
Meanwhile, China’s inflation rate has remained relatively low. Its CPI rose to 2.1% in January 2023. This represents a gain of 0.3 percentage points compared with December 2022. China has a self-imposed 3% inflation ceiling. Food prices, in particular pork and vegetables, were key drivers of price increases. The government’s cancelling of its zero-Covid policy could well see inflation creep up further in the coming months. Consumer demand may outstrip supply in food, travel and entertainment and housing sectors, driving up prices.
The highest inflation rates in the world
Of the 183 countries analysed by Investment Monitor, 70 had inflation rates in excess of 10%. Three of the ten highest rates are found in Africa, with Zimbabwe having the highest inflation rate in the world at 230%. Argentina and Turkey, detailed above, are the only G20 countries in the top ten globally. Russia, the country with the third-highest inflation in the G20, ranks 59th globally. Countries that are relatively poor, import reliant and politically weak are at more risk of higher inflation levels.
Inflation impact on FDI
According to the International Monetary Fund (IMF), world inflation reached 8.8% in 2022 (compared with 2021 prices). The IMF expects this will fall to 6.5% in 2023. It also anticipates that advanced economies will return to normal much quicker than emerging market and developing economies.
The expectation is that inflation will negatively impact foreign direct investment (FDI) levels in the first half of 2023. However, given that most countries in the world are experiencing inflation, investors may also want to undertake FDI to reduce exposure in certain markets. The inflationary pressures may also promote FDI in the form of regionalisation – bringing operations closer to consumer markets. On the contrary, operations farther afield may be deemed too costly, and nearshoring or closures may occur. Foreign investment will depend on inflation levels in the company’s home country and proposed destination country.
Inflation becoming a more prominent FDI driver
Given the high levels of inflation, it would be unsurprising to see investment promotion agencies further promote stable inflation levels in the short to medium term. Although currently not at the forefront of any investment promotion marketing material, an economy with relatively low inflation could promote economic stability to investors. Stable price levels are almost a given in the site-selection process, especially in developed markets. This (now) global issue may change that mindset.
Investors must also judge the expected longevity of rising prices. This may cause overseas expansion to pause in the short term. However, in the medium to long term, inflation will not be as big an issue for cross-border investment. Investors will be closely monitoring government policies to curb inflation. The UK’s Chancellor of the Exchequer, Kwasi Kwarteng, lost his job after the markets reacted badly to his September 2022 mini-budget.
The risk of economies falling into a recession will also weigh heavy on investors' minds, at least into the first half of 2023.
Finally, companies may struggle to find the right talent if wages rise in line with, or even get close to, inflation rates.
How to stop soaring inflation
Interest rates are a key tool in controlling inflation. An increase in interest rates makes it more attractive for people to save money. If people are saving money, they are not spending money, which in turn will start to bring down price levels. Increasing interest rates also makes it less attractive for people to borrow money as they will have larger interest repayments. Imagine the difference in taking out a mortgage with a 1% interest repayment rate compared with a 10% rate. This affects consumers' disposable income.
The key balancing act that governments and central banks must consider is the impact on economic growth. Generally, higher interest rates can tame economic growth as the investors question the investment potential of the country.
If geopolitical factors diminish, there could be a positive supply side impact. The rising price of commodities such as foods and fuel may begin to fall if, for example, the Russia-Ukraine conflict stopped and production levels returned to normal. Eroding supply chain issues would also impact prices from the supply side. For example, falling fuel prices and more easily accessible routes to market could reduce transport costs. In turn, this could result in companies passing on savings to consumers in the form of lower-priced goods. That said, the Russian invasion of Ukraine does not appear to be coming to an end any time soon and the global inflation rate issue is unlikely to have an easy solution.