For a few months now, the following scene has been repeated in many countries: after paying at the register of their usual food establishment, most customers read and review their purchase receipt. They check the prices, why they have paid more for the same products as always. The fact is more than illustrative of the times.
The rise in inflation, which began before the end of 2021 and has gained strength after the Russian invasion of Ukraine, is the main reason for the loss of purchasing power suffered by citizens. Although it is not the only one.
The International Monetary Fund (IMF) exposes in its latest report on the world economy “certain challenges” that contribute to the perfect storm, such as the sanctions against Russia after the invasion of Ukraine, which will reduce oil exports by 30% and gas down to zero at the end of the year; the aftermath of the pandemic with very uneven effects depending on the country, and the transition to low-carbon production, which is vital for global survival.
Household disposable income has fallen more since 2020 than in the 2008 crisis
However, the rapid increase in inflation, also favored by the above factors, is what impoverishes the population more quickly and intensely. The IMF calculates that the world rate in 2022 will be 7.4%, 3.6 percentage points higher than in its October 2021 predictions. Then, the world will be 7.4% poorer at the end of the year than in December of 2021 and that is if the rate does not rise even more.
Gregorio Izquierdo, director of the Spanish Institute of Economic Studies, recalls that inflation is borne equally by households and companies in which “labor tensions are coexisting with the high prices of the raw materials they need for their production.” The expert acknowledges that the problem is serious because “if the consumer price index rises by 10% and wages by 2.5%, the loss of purchasing power is 7.5%”.
The increase in prices has reached all kinds of products. Households, which had already been suffering from the rise in energy for months, are facing the increase in the cost of basic goods such as food, housing and transport, to which education should also be added in many families and which, as a general rule, represent the 50% of the budget. One fact illustrates the situation: on February 25, just one day after the Russian invasion, a ton of corn rose 100 euros from its usual price.
The consequence is that less of everything is consumed. Clothing and footwear are among the items most affected. “Since the beginning of the summer I have already had to lower prices up to four times and, even so, I will have a huge stock of clothing and footwear for this season,” says Luis Arigorren, owner of a women’s fashion store in The center of madrid. Also leisure. Paloma García Aguado, an administrative worker who receives an average salary, admits that during these summer vacations she has been able to enjoy her second home, “but without going out to dinner or having a drink on a terrace.”
Another economist, Raymond Torres, director of the situation at Funcas, assures that the data supports this feeling of impoverishment, “because the disposable income of households has fallen by 3% so far this year. If in 2020, due to the pandemic, it fell by 5% and in 2021 it did not rise, although it did not fall either, we have not seen household disposable income grow for three years. “It’s worse than during the financial crisis that started in 2008,” he stresses.
The OECD urges to take measures to avoid a food crisis
But not only less necessary purchases or services are dispensed with, but the drop in consumption of basic foods such as fruit, oil, meat and fish is already noticeable in many countries, according to the large distribution chains.
The latest report on economic prospects from the OECD, published last June, is pessimistic in this regard. “The war in Ukraine has dashed hopes of seeing an end to the inflation seen in the world economy in 2021 and early 2022 soon due to supply chain bottlenecks associated with Covid-19,” the text states. .
Given that Russia and Ukraine account for about 30% of world wheat exports, 20% of corn, fertilizers, minerals and natural gas, and 11% of oil, “the prices of these products increased considerably after the start of the war and, if no action is taken, there is a high risk of a food crisis.” The OECD concludes that “the sharp increase in prices is already undermining purchasing power and this will force lower-income households around the world to cut their spending on other items in order to cover basic energy and food needs.”
The poverty of the population even affects countries that export raw materials such as Mexico, since its annual inflation rate reached 8.7% in August, the highest since December 2000, although some private organizations place it at 10%. . Despite the fact that the Bank of Spain, in its report on the Latin American economy, predicts that the prohibition of the US and the European Union to import energy from Russia “may benefit more open economies such as Colombia, Mexico and Peru”, the truth is that the income of citizens is now worth 8.7% less.
Energy prices, which had already risen before the Ukraine war, are now skyrocketing. Energy contributes to raising the inflation rate, with all that this entails, but by itself it is already a headache for homes and businesses. An example of impoverishment can be found in prosperous Germany.
Before the summer, and because of its enormous dependence on Russian gas, the federal government warned its population that they had to save money “and shower with cold water.” In this country, as in most of the European Union, measures have been taken to consume less energy, such as turning off public lighting or regulating the degree of air conditioning in summer and heating in winter.
In a country with hot summers like Spain, the price of energy (gas and electricity) has become hell for most. “I have spent the whole summer, since mid-June, fighting the heat with draughts at home so as not to put on the air conditioning. The electricity bill has tripled compared to the summer of 2021, it is impossible to face it, ”says María González, whose household includes two salaries.
Winter is faced with great fear. Although the price of the butane cylinder has risen almost 50% compared to the first months of the year, the sale of stoves has skyrocketed this September, according to a large establishment.
Finally, we must not forget that the rise in inflation has led to a rise in interest rates by the US Federal Reserve and the European Central Bank, which greatly affects the external financing that many households and companies need. . Requesting a loan from a financial institution will make the debt contracted more expensive, especially the mortgage.
The question that everyone is asking at the moment is how long this dark economic situation will last. The experts’ answer is unanimous: everything depends on the conflict in Ukraine, which puts pressure on supplies and the price of food and energy.
However, there is room for some optimism, according to some experts. Raymond Torres, from Funcas, acknowledges that “the uncertainty about inflation is colossal, but there should be some moderation in the last quarter of the year due to the drop in the price of oil, due to that of imported supplies and due to the brake on the price of the food. It is a reality that the origin of imported inflation is receding”. For this economic specialist, “we are close to passing the peak, but in the OECD countries, and more so in Europe, in 2023 the inflation rate will still be high, with the consequent additional deterioration of disposable income.” Torres predicts that next year will also see high inflation in the United States and Latin America, “especially in countries that import food.”
Likewise, Gregorio Izquierdo, from the Institute of Economic Studies, believes that at the end of this year “inflation will be lower and in a year’s time it will have been overcome.” However, he insists that “the great contingency is the war in Ukraine.”
“The gradual easing of supply chain pressures and commodity prices, as well as the impact of rising interest rates, will begin to be felt in 2023,” explains the OECD in its economic outlook for this year. year. However, the agency clarifies that “underlying inflation -which does not compute energy prices among other more volatile components- is expected to remain around the objectives of the central banks or above them in many of the main economies.
The reality is that the war in Ukraine has raised the rate of inflation in countries like the UK, Germany and the US to levels not seen since the 1970s. It is the same conclusion reached by the International Monetary Fund (IMF).