Preparing for a protracted fight against inflation

When crude prices spiked to $80 a barrel in 2009, then-Venezuelan President Hugo Chavez called it a “fair price.” In 2012, he said that the world price of oil should stabilize at around $100 a barrel. Venezuela’s oil industry has collapsed, but the late leader’s prediction of it now looks like a reality. From an all-time low during the pandemic, the global price of crude oil has now been well above $100 since the war between Russia and Ukraine broke out in February. Major oil traders see oil prices may exceed $200, may even reach $250 by the end of 2022.

Every recession since the 1970s has been preceded by a rise in the price of oil. With Russian oil supplies to Europe likely to decline in the coming months, it looks like the crude oil market will remain hot and the prevailing global situation gives a sense of déjà vu over past incidences of recession.

When oil prices soar, both food and non-food staples become more expensive. The global market, reeling from pandemic-induced supply shortages and soaring freight costs, has begun to feel the heat of the Russia-Ukraine war, the third major blow to globalization in a decade after the trade war. between the US and China and the Covid-19 pandemic. . The ongoing war in Europe’s breadbasket, besieged Black Sea ports and sanctions on Russia have caused a supply shock not only of oil, gas and wheat for Europe, but also of a variety of products such as nickel, steel and fertilizers for the rest of the world. . The International Monetary Fund is set to cut its 4.4% global growth forecast for 2022 as a result of the war in Ukraine and sees recession risks in a growing number of countries.

The world is experiencing one of the worst episodes of inflation in decades, and food inflation this time seems more alarming as the war disrupted the supply of wheat and corn from the world’s two breadbaskets: Ukraine and Russia.

Food inflation will be painful for grain-importing countries, as the Food and Agriculture Organization of the United Nations Food Price Index is near the highest level of 1974: wheat rose 65 percent. % in Europe, corn almost 38% and palm oil 55%. However, reference prices for rice have fallen by almost 20%, a relief for the half of the world’s population that lives on rice.

It is also good news for Bangladesh as local farmers produced good harvests during the last few seasons to create a buffer stock. Also, if some imports are needed, it would not be much more difficult to procure it on the world market, unlike in the 2007-08 crisis, when rice export almost stopped due to crop failure in major exporting countries in Asia. .

This time there is enough rice to keep world prices in check. “Right now, rice is all that stands between us and a full-blown food crisis,” says a Bloomberg op-ed, though it won’t ease the wheat market any time soon.

Another concern also remains high. The price of everything needed for crop production, from fertilizers to fuel for farm machinery, is rising, keeping alive fears of further global food inflation. Farming is getting expensive and inflation is so rampant that even with rising food prices, farmers face increasingly tough margins, a Bloomberg report said a week ago.

Soaring fertilizer prices have caused farmers around the world to reduce their use and the amount of land they farm, raising fears of food shortages in the near future, says Reuters.

Combined, Russia and Belarus accounted for more than 40% of global potash exports last year. In addition, Russia supplied around 22% of world exports of ammonia, 14% of urea and monoammonium phosphate (MAP), all key types of fertilizers.

Western sanctions on Russia, a major exporter of potash, ammonia, urea and other soil nutrients, have disrupted shipments of those key inputs around the world. Fertilizer is key to keeping corn, soybean, rice and wheat yields high. Growers from Zimbabwe to Brazil and Canada are struggling to adapt.

India is turning to Canada and Israel to replace its Russian fertilizer supplies, while Asia’s top rice producer, Thailand, faces pressure from uncertain fertilizer supplies.

Bangladesh is also an importer of fertilizer whose prices have already risen and any supply disruption would put rice production at risk.

What is the remedy, then?

As world prices soar, the Bangladeshi government has slashed tariffs and taxes on a number of foods. But prices are still high. The government earlier said it would not cut farm subsidies to keep fertilizer prices stable for farmers.

National Board of Revenue Chairman Abu Hena Md Rahmatul Muneem advised that people should remain prepared to buy necessities at higher prices, as reported by Bdnews24.com.

Countries are trying different ways to protect consumers and farmers.

People in one of our neighboring countries, Sri Lanka, are feeling the effects of a decade high inflation. Policymakers are facing the double whammy of rising prices and high indebtedness as the country is experiencing the fastest growing inflation in Asia.

In January, Sri Lanka’s central bank raised borrowing costs to stem price pressures in the economy and limit a further contraction in growth.

Faced with a three-decade high of inflation, workers in Spain are suggesting a compromise solution: gradual wage increases to ease pressure on employers.

In the UK, the highest inflation in 30 years is seen as the biggest threat to the British economy, which has created pressure on politicians to protect consumers from falling living standards. Chancellor of the Exchequer Rishi Sunak has pledged to help the hardest hit households with $28 billion worth of measures to settle electricity and gas bills.

Inflation was declared public enemy number 1 by US President Gerald Ford in 1974, the year after the 1973 oil crisis.

Now US Federal Reserve Chairman Jerome Powell is now in the hot seat as the world’s largest economy is experiencing high inflation for the first time in 40 years. Raising the policy rate further would make borrowing more expensive for inflation-hit consumers who are already paying high prices for gasoline and groceries. More expensive loans will reduce consumer spending and delay recovery from the pandemic.

Faced with a crucial situation, former Fed chief Ben Bernanke in 2004 compared monetary policymaking to driving an unsuitable car.

“…if doing monetary policy is like driving a car, then the car is one that has an unreliable speedometer, a foggy windshield, and a tendency to respond unpredictably and with delayed throttle or brake,” he said. Bernanke.

Tara Sinclair, an economics professor at George Washington University, describes the situation using an analogy: “Treating inflation in the economy is like treating cancer with chemotherapy. You have to kill parts of the economy to slow things down. nice”. .”

A World Bank blog in February says that rising inflation is being felt in both advanced and emerging and developing economies, the world’s major central banks must find a way out. But the task is not so easy for central banks at a time when the economy was only trying to overcome the shocks of the pandemic.

Thus, inflation has become a global problem, with 78 of the 109 emerging and developing economies facing annual inflation rates above 5%. Bangladesh is one of them, with inflation reaching its highest level in 17 months, mainly driven by rising food prices. With few mechanisms to help households and no market monitoring, consumers in fixed-income groups are bound to feel more pressure if fair-price sales do not cover more households in both rural and urban areas.

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