Description of the picture of global inflation
The 3-year period, covering the pandemic and post-pandemic period, being a mega trend in the global economy, has largely popularized the inflation factor. Because in all countries of the world the process of depreciation of national currencies by countries in comparison with goods and services has accelerated. With the exception of developing countries (DCs), double-digit inflation rates typical for developed countries have not been recorded. Driven by a surge in geopolitical risks, especially against the backdrop of the Russian-Ukrainian war in 2022, supply chain problems have culminated in the highest global inflation rate in 20 years. It is distinguished by a record level of inflation growth in the United States and developed countries of Europe. The consumer price index in the US and UK in June 2022 increased by 9.1% compared to last year.
Sanctions imposed on Russia in connection with the ongoing Russian-Ukrainian war since February 2022 began to manifest themselves in many areas, from transport and logistics problems caused by the war to the start of rising energy prices. According to the Geopolitical Risk Index [1] developed by Dario Caldara and Matteo Lacoviello, geopolitical tensions and the dangers generated by them are mainly distributed in 5 areas: (ı) rising global inflation, (ıı) rising energy prices, (ııı) disruptions in foreign trade relations, (ıv) risks to which banking assets are exposed, and (v) difficulties in performing banking operations. The forms of manifestation of all multidirectional risks give grounds to say that inflation hovers over the world like a ghost.
In terms of high inflation rates in the world, more significant figures in several states attract attention. In October this year, the inflation threshold, expressed in higher figures, was recorded in fraternal Turkey (85.5%) and Argentina (71%). In the EU, the highest inflation rates were in Hungary (20%) and the Czech Republic (18%).
According to the IMF, inflation for the period up to the end of the year will be 3.9% in developed countries and 5.9% in developing countries, a slowdown in price growth can occur only next year.
Inflationary pressures in Azerbaijan and forms of their manifestation
According to the SCS (State Committee of Statistics), in our country in June 2022, 12-month inflation was 14.2%, the average annual inflation was 12.9%, and the average annual inflation rate for food products was 18.4%.
The “Financial Stability Report” of the Central Bank of the Republic of Azerbaijan states that the processes taking place in the world economy have not bypassed the economy of Azerbaijan, as a result, an increase in inflation was observed in the country. Rising food prices and supply chain pressures, driven by geopolitical influences, continue to drive up global inflation. Rising world food prices increase the impact of high inflation on domestic prices through imports. Although, the main factor that generates inflation is the monopoly in the country.
In general, the main factors contributing to financial stability in the country is the high share of the oil sector in exports, as oil and gas prices in the world market are steadily rising. The factor that determines our financial stability is that a lot of money flows into our country through the oil channel, which allows us to maintain financial balance. The document of the Central Bank called “Financial Stability Report” [2] notes that in the first six months of this year, the volume of investments in the oil and gas sector decreased by 21%. And 92.5% of total exports (17.1 billion US dollars) were mineral fuels and oil products.
For reference, the average price of a barrel of Brent crude oil in 2022 was $105. Oil, which is our main export product, was sold on the world market at a price twice as high as predicted by the government.
This means that the rise in energy prices has neutralized the pressure of global inflation on our country. More precisely, the income from our resource income allows us to fully mitigate import inflation. But the efficiency with which this is ensured by the economic structures of the government is another side of the issue.
The question may arise: what is the main object of inflation and which social groups are most protected from it? Our analysis showed that the government has taken steps in this direction to protect against inflationary pressures to a large extent the incomes of wage earners, including those in the public sector. Let’s try to substantiate this conclusion.
In January-June 2022, the average monthly nominal wage of employees in the country’s economy increased by 14.2% compared to the corresponding period of the previous year and amounted to 827 manats. The number of employees in the country’s economy amounted to 1.7 million people, and if we take into account that 900 thousand of them work in the public sector of the economy, and 800 thousand in the private sector, then inflationary pressure on this segment of the population did not have a significant impact. Considering that at that time Azerbaijan had an officially announced inflation threshold of 12.9%, this means that the relative difference in the inflation threshold did not greatly affect the pockets of employees. The officially declared population is 10 million people, which means that inflation has had a direct negative impact on the lives of the remaining 8.3 million people.
A according to the data for the first half of the current year, there are such service sectors where the price increase occurred at a significant pace. Thus, the Financial Stability Report [3] notes that prices for postal services increased by 58%, for natural gas supply services – by 42%, and for electricity supply services – by 12.5%. If prices increased in an area where the energy industries dominate the country’s GDP (non-renewable energy sources 42%, renewable energy sources 12.5%), then it is not difficult to imagine a significant increase in prices in areas dependent on imported goods and falling under the sphere of monopoly.
In essence, when we rationally evaluate inflation, ignoring the inflationary pressure in the country, turning a blind eye to the inflationary pressures in the country and ignoring the worsening social problem, is not an option.
When inflation begins to “devour” the incomes of citizens, the governments of developing countries, using their economic instruments, carry out anti-inflationary measures. For example, they can neutralize inflationary pressure by raising the minimum wage, increasing social payments from the state budget, including wages, pensions, payments to low-income social groups, etc.
This means that if there is inflation, then the state cannot be regarded as a market pattern, but should intervene in the economy as an active participant, and not behave as an outside observer. We need to revive the economy. Steps must be taken to offset the negative social consequences of inflation. It should regulate the economy not through harsh administrative intervention, but with the help of economic instruments (mainly monetary and fiscal). Because in a market economy, prices are unstable. And the negative social consequences of changing prices must be neutralized by the economic structures of the government.
Sources:
[1] Caldara Dario and Matteo Iacoviello (2022), “Measuring Geopolitical Risks,” American Economic Review, April, 112(4), pp. 1194-1225.
[2] https://uploads.cbar.az/assets/e2f42074ed0f61779b824670c.pdf
[3] https://uploads.cbar.az/assets/e2f42074ed0f61779b824670c.pdf
[4] Data from the International Monetary Fund (IMF).
[5] “Financial Stability Report” of the Central Bank of AR [6] Data of the State Statistics Committee
