NO CHOICE BUT TO GET USED TO

The global rise of consumer prices, especially for food, has become, perhaps, one of the most unpleasant economic consequences of the current pandemic crisis. Massive emissions to secure liquidity in an effort to support the population and businesses during the period of severe restrictions, idleness of enterprises, and even entire production chains, as well as many other factors have done their dirty deed. Having somehow corrected the situation in the global economy and stepped over the crisis line, almost all the governments are now thinking of how they can keep the rapid rise in prices for food and other basic products.

Azerbaijan has also been affected by the tendency, although it is still far from a critical state. Yet we can already see a noticeable increase in the cost of certain groups of goods.

We'll have to get used to...

The global economy has faced many problems during the COVID-19 pandemic, including decline in GDPs, production halts, bankruptcies, chaos in financial markets... you name’em. As it turns out, mass vaccination did not become a magic wand capable of returning the usual course of economic processes in an instant, and the world will need more than a year to clear up the consequences of the pandemic.

The main problem today is the widespread and rather tangible rise in consumer prices, which has a negative impact on the welfare of the population. This is highly undesirable for all governments.

After a short summer break, prices for basic food products rise again amid the worsening crop forecasts and an energy crisis, which promises farmers an increase in costs and a shortage of feed and fertilizers.

In September, the UN Food and Agriculture Organisation (FAO) increased its food price index again for the second time in a month, which reached record values in the last ten years. The index, which is based on 95 essential food products, grew by 1.2% in a month and by 32.8% (!) in annual terms. The growth of the real FAO food price index exceeded 20%, which has so far been observed only once – during the 1973-1974 oil crisis, when the Middle Eastern countries imposed an embargo on supplies to the West in response to the Arab-Israeli conflict.

“In terms of real prices, it is more difficult to buy food on the global market now than in almost any year since 1961, when the UN started keeping statistics,” Alistair Smith, Senior Research Fellow at the University of Warwick, said.

The situation is seriously affected by the energy crisis that covered Europe and hit China, where, due to a lack of coal, the authorities were forced to stop plants. All this adds to the problems of farmers. “If power shortages and production cuts continue, they could also trigger global supply problems, especially if they start affecting export production,” said Louis Kuys, Senior Asia Economist at Oxford Economics.

Meanwhile, the largest food producers admit that they were forced to raise prices due to the rise in inflation rates almost everywhere in the world. So, according to the head of Kraft Heinz, Miguel Patricio, consumers will have to get used to higher food prices, given that the world's population is growing, as opposed to the area of lands used to grow food.

Large food manufacturers such as Kraft Heinz, Nestle, and PepsiCo will likely be forced to pass these costs onto consumers, said Kona Haq, head of research at ED&F Man. She believes this will affect all food manufacturers. Consequently, they will all raise prices in about the same way, since everyone will do it, which means that they will not lose customers.

Consecutive records

As a result, both the developed and other economies update their long-term inflation records.

In the Eurozone, inflation rate has hit a 13-year record. In September, consumer prices increased by 3.4% in annual terms, up from 3% in August. In Germany, Europe's main economy, price increases peaked in nearly three decades. In the same month, inflation rate in Germany rose to 4.1%, exceeding the average estimate.

Rising inflation rates in the US also exceeded estimates and hit a record - the jump was the highest since 1991, Bloomberg reports.

The PCE Price Index, an indicator of personal consumption spending that the Federal Reserve System uses to set its inflation target, grew 0.4% in August and 4.3% over 2020.

Also in September, consumer prices rose by 19.58% in annual terms in Turkey, which is the fastest growth rate since March 2019, according to the country's statistical body (Turkstat). In the same month, prices for food and soft drinks in Turkey were 28.79% higher than a year earlier, energy prices rose by 22.77%, transport services by 20.21%, utilities by 20.97%...

This tendency was also observed in Russia, where the inflation in September 2021 accelerated to 7.40% (maximum since June 2016).

For some groups of goods (vegetables, meat, and cars), the growth of inflation rate was especially rapid.

Also, the growth of consumer prices in Kazakhstan hit the five-year record – 8.9% compared to the same period last year, which is the highest indicator since the end of 2016. According to the classic scenario, the most noticeable jump in food prices was observed in September (an average of 11.5%).

Inflation rate in Georgia also updated the ten-year record, and grew by almost 13% in annual terms, with more than 16% growth in food prices.

Controversial key rate

One can observe a similar situation in almost all countries of the world. This can be explained by the relaxed monetary policies of banks during the pandemic. That is, the authorities have willingly pumped up the economy with money through, for example, direct payments to the population or cheap loans. As a result, demand has grown, and production cannot keep up the pace.

In fact, the fight against the economic consequences of the pandemic is based on two main tools - lowering interest rates and printing money. The latter reached record levels in the dollar zone, meaning that it is now impossible to avoid the growth of inflation.

According to experts, the only way out of the stalemate is the tightening of monetary policies and a gradual increase in interest rates by central banks.

Although the US and the UK do not agree with this thesis and decided to leave the key interest rate unchanged, they also warned that they could increase interest rates no later than next year. That means that the authorities intend to curtail the existing monetary policies to stimulate the economy.

However, a number of central banks, in particular in Norway and Russia, have already decided to increase their interest rates. On September 10, the Bank of Russia raised the key rate to 6.75%. The bank noted that in 2Q2021, the Russian economy reached the pre-pandemic level. However, demand is growing faster than production opportunities, so the pressure on prices continues. Along with high inflationary expectations, this can further raise prices, the Central Bank of Russia reported back in the time.

Meanwhile, according to Bob Prince, Chief Investment Officer of Bridgewater Associates, the hesitation of central banks threatens the global economic recovery. It will be difficult to prevent the price rise due to the shortage of resources, which are in great demand amid the recovery of the global economy after the pandemic. If the Fed takes tough measures to curb inflation, this will lead to a fall in financial markets.

Interest rate has become a real headache in Turkey again. President Recep Tayyip Erdogan said that he had lost confidence in the head of the Turkish Central Bank, Shahap Kavcioglu. According to Reuters, Mr. Erdogan is disappointed with the slow implementation of his demands to ease monetary policy. Thus, Erdogan insisted on cutting the interest rate, as he believes that the reduction in the cost of borrowing should curb inflation. His views are at odds with the views of the global central banks: it is generally accepted that a low interest rate increases the amount of money in the economy, which causes prices to rise. To fulfil his own obligation and to meet the president's demands, Mr. Kavcioglu said that the regulator would focus not on general inflation, but on the basic one, which excludes goods with high price fluctuations. In September, the Central Bank lowered the interest rate from 19% to 18%.

However, this decision had the opposite effect and led to the fall of the national currency, which dropped to a record low of 8.92 lira per $1.

The pandemic has created real chaos in inflationary processes and the nervousness of governments and central banks in this case is understandable - no matter what the decisions are, so far there are no positive results.

Azerbaijan: the logical approach of the Central Bank

As for Azerbaijan, the Central Bank’s forecast for the average annual and annual inflation rates by the end of 2021 are 5.4-5.8% and 7-7.5%, respectively.

“In general, inflation rate is rising in most countries of the world, and it goes well beyond the established target corridors. Inflation in Azerbaijan is influenced by internal and external factors,” CBA stated on the parameters of the discount rate.

According to CBA, in 2022 the average annual inflation rate in Azerbaijan will slow down to 4-5%.

Earlier the Ministry of Economy forecast the average annual inflation rate in Azerbaijan by the end of 2021 at 4.9% against 2.8% in 2020.

But even without these numbers, there is a certain rise in prices for food and for some categories of essential goods in Azerbaijan. Fuel prices have risen again: since September 15, prices for AI-95 and AI-98 gasoline have increased from ₼1.45 to ₼1.6 and from ₼1.6 to ₼1.9 per litre, respectively.

It is clear that it is unrealistic to avoid the influence of the global economy, especially the processes taking place in neighbouring countries, as well as in the main trade partners of Azerbaijan, on the internal economic situation.

But in this case, the Central Bank of Azerbaijan sided with those colleagues who consider it appropriate to curb the inflation rate through the gradual tightening of monetary policy. Since September 18, CBA has increased the discount rate by 0.25 percentage points up to 6.5%. Increase in the refinancing rate eventually increases the interest rate of commercial banks and other macroeconomic indicators. Therefore, by the end of 2021, CBA’s rate may affect the cost of money issued by lending and other financial institutions. Expensive loans will slow down their volumes. Fewer loans means less real money in circulation, which means that there are fewer opportunities for consumers to spend money.

This is a completely logical move, given that the national economy must be able to digest large investments in the restoration of liberated lands, and the rise in oil prices, and many other factors considered risky for inflation.

Cheer up

Despite such a negative overall picture, international financial institutions hope for a positive future. International Monetary Fund (IMF) made quite optimistic forecasts, expecting the global inflation rates slow down during 1H2022. “We forecast that higher inflation is likely to persist in the coming months before returning to pre-pandemic levels by mid-2022, although risks of acceleration remain,” IMF said.

IMF expects annual inflation rates in advanced economies to peak at an average of 3.6% in the final months of this year, before returning to 2% in 1H2022, in line with central bank targets. Emerging markets will see faster growth, to 6.8% on average, and then decline to 4%.

In short, the phrase “life will not be the same as before the pandemic” popular over the past two years gradually becomes true in terms of consumer prices: even if they grow more slowly, it seems they will hardly return to the pre-crisis level...