Life is getting more expensive.
Around the world, people are watching prices get pumped up by forces beyond their control.
I’m talking about inflation.
Right now, countries and entire continents are seeing the costs of everything from food,
to clothes, to fuel, rising at record rates.
“going to the grocery store food is way more expensive than it was even a year ago.//
So a lot of people are having trouble making ends meet.“
In this video we’ll explore why.
“The first thing CEOs will do is pass the prices on to consumers// contributing to inflation.”
We’ll look at what’s being done to tackle inflation…
And whether it’ll work… or simply make things worse.
“It's cut policy rates aggressively this year, or over the last year, on direction
from Erdogan.
And inflation as a result has spiralled out of control.”
Welcome to Business Beyond.
Let’s begin in the United States, where inflation is at a forty-year high.
A survey by the US census bureau suggests - in the richest country in the world - people
are struggling to be able to afford what they need.
Roughly a quarter of the people who make less than the poverty line have said, yes, I'm
hungry and I don't have enough food because I can't afford it.
And then people who are even above the poverty line, but kind of like lower middle class
and even middle middle class.
So people making up to $50,000 a year, at least 11% of those people are saying, yes,
I'm hungry.
And the reason why is because I can't afford to buy food.
But how did the US get there?
This may sound counter-intuitive.
But at least for a while, the pandemic actually made Americans richer, on average.
The US government sent out thousands of dollars in stimulus checks.
People who lost their jobs received months of generous unemployment benefits.
And soaring stock prices boosted the wealth of the wealthiest.
As a result, savings soared.
And starting in early 2021, Americans began to spend that money.
On things like tech and clothes, and going to reopened restaurants and bars.
At least in the US, a lot of goods are imported from elsewhere, from Asia, China in particular,
and China and many other Asian economies have a zero tolerance policy for COVID 19.
So whenever there's an outbreak, factories are shut down, workers are not allowed to
move around.
People can't engage in activities.
And so that affects the supply chain.
So you have strong demand for these goods, important goods, insufficient supply of those
goods.
And so that leads to higher inflation.
And the costs of doing business keeps getting higher too.
Apart from expensive raw materials, businesses are also struggling with staffing shortages.
Finding people, especially for in-person work in the retail or hospitality industries has
become difficult for various reasons - including increased illness risk, or difficulty finding
childcare for children who can’t go into school.
Businesses are raising wages to attract workers.
And for some businesses, they can absorb that into their profit margins where they might
cut costs somewhere else to accommodate for the wages.
But our survey //of 900 CEOs globally and even in the US, in the US, the first thing
CEOs will do is pass the prices on to consumers// contributing to inflation.
The US Federal Reserve has already signaled it could raise interest rates three times
in 2022.
Higher interest rates make borrowing more expensive and saving more appealing.
So the idea is that hiking rates encourage people to put their money away rather than
spend it.
That would suppress demand and keep prices from getting ever higher…heading off a potential
wage-price spiral.
if people start going to their bosses and saying, well, you know, everything costs more,
I need a raise, then it begins.
So the boss says, okay, I'll give you a raise.
But then if everybody gets a raise, then businesses, companies will say, well, now I could charge
more.It just becomes this vicious cycle.
Across the Atlantic, in the countries that use the Euro, the risks of inflation are also
being assessed.
Here in Europe, the surge in inflation has been especially surprising.
Because for the past decade policymakers have been battling the opposite problem: stubbornly
low inflation.
“So Europe was an example of this, but actually this is a developed economy issue.
The concern was sort of the Japanification of the entire developed world.
And what's really behind that is an excess of savings.
So a savings glut.”
But saving money is good right?
Well, not always.
Over the past two decades, developed countries have been saving a lot of money.
Too much money, actually.
And that means that they’re not spending, or investing money as much as they could.
And in the end, that constrains both economic growth and inflation.
In the first months of the pandemic, fears over low inflation deepened.
Inflation actually turned negative in the Eurozone… as people stayed home and businesses
shut, reducing demand–and prices–for goods and commodities.
As in the US, that changed in 2021.
In part thanks to a vaccine rollout that allowed businesses and consumers to start spending
again, driving demand and prices back up.
But that’s just part of the story.
It leaves out the single most important driver of inflation here.
“Inflation has been driven much more by energy costs in Europe, and the causes for
higher energy costs are multiple.
They range from weather patterns.
So the wind didn't blow as much off the shores of Germany as they had in the past.
A lack of investment in infrastructure, particularly renewable energy, low inventories for oil
and gas already, and then of course, geopolitical strains with Russia amassing troops and weapons
along the border with Ukraine.
That has caused a big change in pricing for energy.
“
Energy bills for households in Western Europe are expected to rise this year by as much
as 54% (Bank of America).
That has left policymakers at the European Central Bank in Frankfurt in a tricky spot.
Their only job is to control inflation.
And inflation has been running significantly above their 2% target.
There’s really nothing that the ECB can do about energy costs.
And so I do think that given that the fiscal stimulus in Europe was much smaller than in
the U.S., you're not facing the kind of demand driven inflation in Europe that you are in
the U.S.
And so there's very little that the ECB has in its toolbox to address it.”
ECB President Christine Lagarde has been crystal clear: the central bank believes that this
surge in inflation will pass—and soon.
The ECB expects inflation to fall ‘sharply’ this year as the heat’s taken out of the
energy market.
“Tthis is just a temporary blip in terms of higher inflation because we still have
a glut of savings.
There are a number of kind of big structural drivers of high savings, high national savings
across the developed world, and they include things like demographics, which haven't changed
at all.
If anything, they've just been made worse because of the pandemic.
So I think that in a year or two, this glut of savings should reassert itself.
Leaving the Eurozone now, and on to its eastern neighbor, Turkey, where the inflation story
is largely one of self-inflicted pain.
Turkey is experiencing one of the world’s most brutal inflation surges.
But unlike much of the rest of the world, it did not start with supply chain shortages,
soaring commodities prices, or skyrocketing demand.
Many economists say the blame lies squarely with the country’s President: Recep Tayyip
Erdogan.
“Erdogan doesn’t believe in the basics of monetary policy and the basics of market
economics, which is that higher interest rates counter inflation.
He doesn't believe that.
He argues that high interest rates CAUSE inflation.
“You will soon see how our interest rate policy will be formed.
Because interest rates are the mother of inflation."
“The central bank of Turkey has not been able to run Orthodox policy.
It's cut policy rates aggressively this year, or over the last year, on direction from Erdogan.
And inflation as a result has spiraled out of control.”
Turkey’s government’s statistics agency, puts inflation at an already breathtaking
36%.
However, researchers analyzing thousands of prices within Turkey say the true annual inflation
rate is more like 83% (source ENAGrup).
The feelings of the people are totally different from the government inflation figures - on
the street, in daily life, on the macroeconomic side of the story./ …
"I think inflation is higher.
Everything got at least twice or three times as expensive."
"We know exactly what we are paying at the supermarket – I think it's 50% or more.
"I don't believe the official numbers.
I've been running around for two hours trying to find cheap bread.
I think we are seeing 100% inflation right now!"
But no matter how high inflation gets, Erdogan continues to insist that interest rates are
kept low.
And he’s shown he’s willing to sack any central banker who disagrees with him ((Show
screen grabs of headlines about sackings)).
This unconventional approach to interest rates has had a number of knock-on effects for the
economy.
For one, it’s driven away foreign businesses and investors.
“Turkey was a great story in the first decade of AKP rule.
In 2010, 2011, everyone wanted to get into Turkey and invest.
It had high growth, great demographics, good banks, good corporates.What's changed though,
is unorthodox policy, which means stop-go cycles which makes it very difficult to plan.
If you don't know what inflation is going to be and where the exchange rate is going
to be, how can any business plan investments and broader activity?
“ (26:35-27:11)
But worse, it’s led to a sharp deterioration in the lives of most Turks.
In Istanbul, people wait in long lines for subsidized bread.
That means Edrogan’s controversial approach to economics could end up costing him his
presidency.
He’s up for reelection in 2023.
And opinion polls show support for him eroding.
“The last decade of AKP rule under ‘Erdogan Unchained’ has been one of living standards
falling, of inequality rising.
So Turks have been getting poorer.
So I think ultimately that will make it very difficult for Erdogan to be reelected.”
Reelection or no re-election, enough damage has been done.
And experts fear it can only get worse if Turkey continues on its current path.
I believe that the Turkish economy will be experiencing the sudden stop in two or three
years, if not in one.
Inflation will be reaching three-digit levels.
The profit will be lower than the average cost of the production.
Then for any firm there will be no single reason to open the door and make the production
in the short run and in the mid run.
Our next stop shows how easily frustration over inflation can boil over into political
crisis.
Kazakhstan has long been seen as an example of a remarkably stable post-Soviet Union state.
One with vast reserves of oil and gas, high levels of investment from abroad, and a regime
in place since the fall of the Soviet Union 30 years ago.
That changed in January as protests rocked the Central Asian country.
What began as a demonstration over a government decision to remove price controls on a key
fuel source...turned into a wider backlash over rising inflation and inequality.
“The demonstrations hit a raw nerve, a seam of unhappiness in Kazakhstan that elites in
the country had milked those massive earnings from raw materials and kept most of them themselves.
So this was also about inequality and social injustice and falling living standards.
SPLIT But inflation certainly was the spark.
”
That leaves Kazakhstan facing twin economic and political crises.
And while protests have since been quelled, neither crisis is anywhere close to being
resolved.
“In the end, President Tokayev seems to only be able to restore order with a backstop
of Russian troops.
It was president Putin essentially saying Tokayev is my man.
I'm willing to back him.
And the challenge, I think there is, what that is for Kazakh sovereignty.
, um, Putin, there will be a fee to be paid or a price to be paid for that.”
More than 200 people died in January’s protests in Kazakhstan, according to the authorities
there.
And 8000 people were detained.
Kazakhstan should serve as a cautionary tale to the rest of the developing world.
In the world’s poorest countries, inflation is threatening people’s ability to feed
themselves, or keep a roof over their heads, or put fuel in their car to get to work.
For politicians, ignoring that is becoming all but impossible.
“Higher inflation ultimately means lower growth.
But it also means the poor suffer disproportionately.
Many of these countries already have weak social and political systems.
They're vulnerable.
They're very vulnerable, unless they quickly get inflation under control.”
Inflation affects everyone.
We all need food, clothes and a way to keep warm.
That’s why policymakers have a vital job in keeping it under control and protecting
the poorest among us, wherever they are in the world.
And that’s it from this edition of Business Beyond.
Please hit like and subscribe if you’ve enjoyed it.
And why not check out our recent video about the global energy crisis while you’re here.
Until next time, take care.