The beginning of 2022 witnessed rising energy prices, continued supply disruptions and sluggish rates of economic recovery. Added to this, central bankers are increasingly concerned by rising global inflation.
What has caused the rising wave of high inflation?
Inflation has risen largely in the wake of higher global commodity prices, global supply chain bottlenecks, rising food and energy prices, currency depreciations at the start of the pandemic and adverse climate shocks. Massive monetary stimulus packages, known as quantitative easing, that were rolled out over the last two years also contributed to increasing consumer prices. Prices are rising at the fastest pace in almost four decades and the tight labour market in key economies has also started to feed into wage increases [1]. Inflation has risen throughout the second half of 2021, driven by several factors of varying importance across regions.
Figure 1. Price pressures (change in inflation, Dec 2020-latest, percentage points)
Source: Haver Analytics; and IMF staff calculations
Note: Inflation refers to the year-over-year change in consumer prices from Dec 2020 through the latest data. Exchange rate refers to short-term depreciation-induced inflation using estimates by Carrière-Swallow and others (2021). Sample includes countries with all components available. Purchasing-power-parity weights are used for aggregation.
Which regions seem to be mostly affected by this?
The US registered 7.5% inflation in January 2022 – the highest in 4 decades [2]. The European Central Bank reported 5.6% inflation in the Euro zones for the same period [3] while the Bank of England projects 7% inflation by Spring of 2022. It has been seen across East Asia that prices have been largely immune to inflationary pressures, but this could also change later in 2022. In China, CPI dropped to 0.9% in January mostly because of weakening demand and lower food prices but it is forecasted to average 2.2% later in 2022. [4] Africa is expected to see some of the highest inflation rates in the world in 2022. It is clear therefore that the primary drivers of inflation are not the same across countries.
Figure 2. Reuters Poll: 2022 Global inflation forecasts
Source: Reuters Polls
Sujith Pai and Milounee Purohit ┃REUTERS GRAPHICS
Note: Poll conducted Jan. 4-26, 2022. Over 500 economists responded to the inflation outlook of 46 economies. Economies in grey are not covered.
78 out of 109 EMDEs (Emerging Markets and Developing Economies) are facing inflation rates above 5%. Currency depreciation has caused inflation through the channel of imported goods and because inflation expectations in EMDE’s are more impacted by currency movements than in Advanced Economies (AE’s), the pass-through from exchange rates to prices tends to be faster and more pronounced. It is seen that food inflation hits consumers more in developing and emerging economies because food accounts for a larger share of the average household consumption basket which means that inflation in these economies will be more persistent. [4]
What impact does this have on African economies?
Structural limitations generally limit the abilities that monetary authorities in Africa have when it comes to controlling inflationary pressures, despite the steady improvement of monetary frameworks that have been seen in some countries. In recent months, emerging markets with high public and private debt, foreign exchange exposures, and lower current-account balances saw already larger movements of their currencies relative to the US dollar. [5]
There have been varied responses to inflation across African countries. For example, in the beginning of the year in East Africa, Kenya and Uganda had left their benchmark interest rates unchanged. Uganda’s Central Bank kept its benchmark policy rate unchanged at 6.5 percent for February 2022 following the full reopening of the country’s economy last month alongside renewed business optimism across several sectors [5]. Rwanda’s central bank on the other hand has raised its benchmark lending rate to address soaring inflation and minimise price shocks to households. The central bank rate has been set at five percent from 4.5 percent, the first increase since April 2020.
What is growth in African economies looking like for 2022?
The IMF predicts that Africa will continue to face Covid-19 related problems compounded amongst other factors, by a vaccination rate that lags well behind most other regions. In the absence of vaccines, the emergence of deadly and more transmissible new variants threatens to curtail Africa’s recovery. [6]
Figure 3. Real GDP Growth Revisions since April 2021 (in percent)
Source: IMF, World Economic Outlook database
The Fund says that the top five economies to grow in Africa will be The Seychelles, Rwanda, Mauritius, Niger, and Benin which all looks set to hit above 6% growth. Other countries such as Ghana, Côte d’Ivoire and Senegal also look set to grow at near pre-pandemic levels. These countries all boast diversified economies with governments that are working to attract investment, build key infrastructure and boost manufacturing and services. [6]
Nigeria, Angola, and South Africa are ranked amongst the slowest growing economies, with GDP growth at 2.7%, 2.4% and 2.2% respectively. Ethiopia, which has been embroiled in civil war for more than one year, faces being last in the list, as it is ranked the 54th country in Africa for 2022 forecasts.
Global response to rising inflation
The G20 Finance Ministers and Central Bank Governors meeting held in February 2022, with Indonesia presiding, covered a number of key topics. This included discussions on building resilience in global supply chains so as to reduce the pressure this places on inflation, addressing the impacts of the pandemic particularly on those most impacted such as youth, women and informal/low-skilled workers, as well as for Central Banks to act where necessary to ensure price stability (in line with their respective mandates) to curb rising inflation. The full communique from the G20 Finance Ministers and Central Bank Governors meeting is here: G20-FMCBG-Communique-Jakarta-17-18-February-2022.pdf
In keeping with this theme, International Economics Consulting CEO, Mr Paul Baker discussed the trend of rising inflation and what is driving this with CNBCAfrica. Key discussion points are the impact to African countries and what this means for economic recovery in Africa considering the unequal access to economic and other tools supporting recovery. Watch the interview with CNBCAfrica on this link https://www.cnbcafrica.com/media/6298583837001/
What does the recent conflict in the Ukraine mean for global economic recovery and inflation targets?
Soaring energy costs accounted for more than half of the Euro regions record inflation rate in January and that was before the conflict in Ukraine had escalated. Most western leaders have strongly condemned the 24th February invasion by Russia and have already started imposing severe economic and political sanctions on Russia. The pandemic has already left the global economy with high inflation and fragile and volatile financial markets. Russia is a major supplier of oil and gas to the EU and sanctions on Russia will affect the supply of energy to the rest of Europe. Europe gets nearly 40% of its natural gas and 25% of its oil from Russia. If the gas line from Russia to the EU is switched off as part of sanctions against it, this will hurt the EU economy, potentially lowering EU GDP by 3%. Global food prices, which are at a decade high, could also be affected as Russia and Ukraine account for nearly a quarter of total global exports of wheat. [7]
Even without the appearance of a new variant of Coronavirus to destabilise world growth, the Ukrainian crisis will dampen any growth expectations and lead to large spikes in inflation. The outlook on a global economic recovery will be revised downwards.
Paul Baker is the founder and CEO of IEC. He is a consultant for various governments in developed and developing countries, an adviser on global corporate strategies to multinationals, and a Visiting Professor at the College of Europe. Paul is an expert in the Working Group of the World Economic Forum’s (WEF) Digital Flows Initiatives, an Expert in the WEF/WTO’s TradeTech Working Group on AI, IOT, Blockchain and Digital Identities for trade, and is on the Board of the United Nations Economic and Social Commission for Asia Pacific’s Trade Intelligence tools. He is also a member of the UK’s All Party Parliamentary Committee on Trade.
References
[1] Labour markets and inflation in the wake of the pandemic (bis.org)
[2] U.S. Inflation Rate Accelerates to a 40-Year High of 7.5% – WSJ
[3] Inflation rate EU by country 2022 | Statista
[4] The Return of Global Inflation (worldbank.org)
[5] Economic Outlook 2022: Africa faces rickety rebound – African Business
[6] Regional Economic Outlook for Sub-Saharan Africa, October 2021 (imf.org)
[7] How the Ukraine-Russia War Could Impact the Global Economic Recovery from Covid – Bloomberg
