Bracing for a prolonged fight against inflation

When crude prices soared to $80 a barrel in 2009, the then Venezuelan president Hugo Chavez said it was "fair price". In 2012, he said the global price of oil should stabilise at around $100 per barrel. Venezuela's oil industry has collapsed, but the prediction of its late leader now seems a reality. From the historic low during the pandemic, global crude price has now been well above $100 since the Russia-Ukraine war broke out in February. Top oil traders see oil prices may exceed $200, may even reach $250 by end-2022.

Every recession since the 1970s was preceded by an oil price hike. With Russian oil supplies to Europe likely to decline in the coming months, the crude oil market looks set to stay heated and the prevailing global situation gives a sense of déjà vu about past incidences of recession.

When oil prices skyrocket, both food and non-food commodities become costlier. The global market, reeling under the pandemic-induced supply crunch and high freight costs, has started feeling the heat from the Russia-Ukraine war, the third big blow to globalisation in a decade after US-China trade war and the Covid-19 pandemic. The ongoing war in Europe's breadbasket, besieged Black Sea ports and sanctions on Russia have triggered a supply shock not only on oil, gas and wheat to Europe, but also a range of goods such as nickel, steel and fertilisers to 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 bouts of inflation in decades, and food inflation this time looks more alarming as the war disrupted wheat and corn supplies from the world's two breadbaskets – Ukraine and Russia.

Food inflation will be painful for grain importing countries as the UN Food and Agriculture Organisation's food price index is close to the all-time high level of 1974 – with wheat surging 65% in Europe, corn nearly 38% and palm oil 55%. However, benchmark rice prices are down almost 20% – a relief for half of the world's population who live on rice.

It is good news for Bangladesh, too, as local farmers produced good crops during recent seasons to create a buffer stock. Moreover, if some imports are needed, it would not be much harder to procure from the global market, unlike the 2007-08 crisis when rice export was almost stopped due to crop loss in major exporting countries in Asia.

There's enough rice this time around to keep global prices in check. "Right now, rice is all that's standing between us and a full-blown food crisis," says a Bloomberg opinion piece, though it won't ease the market of wheat any time soon.

Another concern also remains high. Price of everything needed for crop production – from fertiliser to fuel for farm machinery – is surging, keeping fears of further global food inflation alive. Farming is becoming expensive and inflation is so rampant that even with rising food prices, farmers are facing increasingly tough margins, said a Bloomberg report a week ago.

Sky-high fertiliser prices have farmers worldwide scaling back its use and reducing the amount of land they are cultivating, which raise fears of food shortages in near future, says Reuters.

Combined, Russia and Belarus accounted for more than 40% of global exports of potash last year. Moreover, Russia supplied about 22% of global exports of ammonia, 14% of urea and monoammonium phosphate (MAP) – all key kinds of fertilisers.

Western sanctions on Russia, a major exporter of potash, ammonia, urea and other soil nutrients, have disrupted shipments of those key inputs around the globe. Fertiliser is key to keeping corn, soy, rice and wheat yields high. Growers from Zimbabwe to Brazil to Canada are scrambling to adjust.

India is turning to Canada and Israel to replace its Russian supplies of fertilisers, while Asia's major rice grower Thailand is facing pressure from fertiliser supply uncertainty.

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

What is the remedy, then?

As global prices are soaring, the Bangladesh government cut duties and taxes on a number of food items. But prices are still high. The government earlier said it would not cut farm subsidies to keep fertiliser prices stable at farmers' end.

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 neighbouring countries, Sri Lanka, are feeling the pinch hard of decade-high inflation. Policymakers there are facing the double whammy of rising prices and high debt, as the country is experiencing Asia's fastest growing inflation.

Sri Lanka's central bank in January raised borrowing costs to arrest price pressures in the economy and limit further contraction in growth.

Facing a three-decade high in inflation, workers in Spain are suggesting a compromise solution – gradual salary increases to ease pressure on employers.

In the UK, a 30-year-high inflation is seen as the biggest threat to the British economy, which has created pressure on policymakers to protect consumers from a tightening squeeze on living standards. Chancellor of the Exchequer Rishi Sunak has pledged to help the hardest-hit households with $28 billion of measures to clear electricity and gas bills.

Inflation was declared Public Enemy No 1 by US president Gerald Ford in 1974, the year following the 1973 oil crisis.

Now, US Federal Reserve Chair Jerome Powell is now in the hot seat as the world's largest economy is experiencing high inflation for the first time in the past 40 years. Hiking policy rate further would make borrowing costlier for inflation-hit consumers, who are already paying high prices for gas and groceries. Costlier borrowing will reduce consumer spending and slow pandemic recovery.

Facing a crucial situation, former Fed chief Ben Bernanke in 2004 compared making monetary policy with driving an unfit car.

"...if making 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 a delay to the accelerator or the brake," Bernanke said.

Tara Sinclair, professor of economics at the 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. It's not a pleasant treatment."

A World Bank blog in February says inflationary surge is being felt in both advanced as well as 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 just trying to overcome pandemic shocks.

Inflation thus has become a global problem with 78 out of 109 emerging and developing economies confronting annual inflation rates above 5%. Bangladesh is one of them, with inflation reaching 17-month high driven mainly by food price hikes. With little mechanism to help households and absence of market monitoring, consumers of fixed-income groups are destined to feel more pinch if fair price sales do not cover more households both in rural and urban areas.