Inflation rates are soaring throughout the world. Many economies are experiencing double or triple digit rises in prices.
- Inflation is soaring across most of the world’s economies.
- 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 at double-digit levels.
- 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 warzone. 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, have 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 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.
Additionally, supply chain issues – the ability to get goods from production to consumption – still linger. Not only do these directly impact inflation, 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 October 2022, Turkey’s rate reached 85.51% (compared with prices in October 2021). This means that goods costing 100 Turkish lira (Tl) in September 2021 would now cost Tl185.51. It has also experienced the largest growth in inflation of any G20 country, more than 60 percentage points inside 12 months. Its biggest causes of rising prices are related to transport, food and housing. The lira is also in freefall against the US dollar. One lira is worth $0.054 (as of 16 November 2022), half the value it was around the same period in 2021 and one-quarter 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 October 2022 were 88% higher than October 2021. This means it has overtaken Turkey to be G20 country experiencing the highest level of inflation. 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 October 2022, its inflation rate was 12.6%. The Russian central bank decided to cut interest rates in September, stating that consumer price growth rates remain low. 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.
Germany, Italy and UK are struggling to curb inflation
Inflation in the UK is at its highest level in 40 years. In October 2022, the country’s inflation rate was 11.1%, up slightly from September (10.1%). The Bank of England expects inflation to peak at 11% in October 2022 then remain above 10% for a few months before coming down.
Germany's October 2022 figures show its consumer price index (CPI) has jumped to 10.4% (having been 7.9% in August and 10% in September). This is the country's highest rate since German reunification. Energy prices were 43% higher in October 2022 compared with October 2021. Chancellor Olaf Scholz has announced plans for an energy relief package worth €150–200bn ($145–194bn) to try to bring down prices. Entering a recession in the coming months is a real possibility for the EU’s largest economy.
Another advanced western European economy hitting double-digit inflation is Italy. Year-on-year inflation reached 11.9% in October 2022. This is the highest rate of any advanced economy in the G20. Similar to Germany, energy costs in Italy have increased by 45%. However, it is food costs that are driving inflation further upwards in the southern European country.
Inflation levelling off in the US?
Inflation in the US is beginning to show signs of levelling off. Although it is still high at 7.7% (as of October 2022), this still represented the third successive month in which it had fallen. The drop comes after the Federal Reserve increased interest rates from 3% to 3.75%–4% in a few iterations (and months) as part of its efforts to bring inflation down to its 2% target. Inflation in the US is being driven by the increased cost of housing, food and medical care.
China’s inflation rate has begun to show signs of slowing. Its CPI rose to 2.1% in October 2022. This represents a fall of 0.7 percentage points compared to September 2022 – which was close to the 3% inflation ceiling. Food prices, in particular pork and vegetables, were key drivers of price increases. China’s zero-Covid policy is set to be questioned once more in a bid to stimulate its economy. However, it is unlikely to budge, meaning lower-than-expected GDP growth in the final quarter of 2022 looks likely.
The highest inflation rates in the world
Of the 172 countries analysed by Investment Monitor, 74 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 269%. 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 54th 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, world inflation is expected to reach 8.8% in 2022 (compared with 2021 prices). It also expects a convergence between advanced and developing economies. Advanced economies are expected to experience a 7.2% annual rise in average consumer prices, while emerging markets and developing economies should see inflation around the 9.9% mark. This gap of 1.7 percentage points is smaller than the corresponding gap in 2008 of 5.9 percentage points.
The expectation is that inflation will negatively impact foreign direct investment (FDI) levels. However, given 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.
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 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.