Lhe Covid-19 pandemic continues to hit the global economy hard and cause harmful damage, including a global price spike. Inflation refers to the loss of purchasing power of money and is materialized by a general and lasting increase in prices. This loss in the purchasing power of money can be measured, in part, by the consumer price index.
This soaring food and energy prices penalize the purchasing power of the middle and poor classes and contribute to the enrichment of asset holders. Weakened by the damage of the pandemic, households are bearing the brunt of the consequences of inflation, particularly in terms of food and energy prices. According to the economist Jean-Yves Naudet, “inflation is a mask: it gives the illusion of ease, it erases errors, it only enriches speculators, it favors recklessness, short-term potion and long-term poison, victory of the cicada over the ant”.
The epiphenomenon of inflation has started to take place since 2021, but it has become more pronounced in 2022. According to the Consumer Price Index – CPI of the United States, for February 2022, the inflation rate inflation has reached its highest level since 1982 and now stands at 7.9%. And to try to absorb this rise in prices, the chairman of the American Federal Reserve (FED), Jerome Powell, says he is inclined to propose six successive rate hikes of 25 basis points. The desired end is to reduce consumption through more expensive loans and thus lower the pressure on prices. In France, and according to the latest estimates from the National Institute of Statistics and Economic Studies (INSEE), the inflation rate could exceed 4.5% in one year in March 2022. The institution attributes this meteoric rise to soaring prices at the pump and uncertainty of supplies due to the war in Ukraine. And in the Euro zone, inflation continues to soar and stands at 5.8%.
According to the latest figures provided by the Statistical Office of the European Union (Eurostat), the strong evolution of inflation is largely due to the energy component which shows a dizzying increase of 31.7%. But to understand the current inflation figures, we offer in what follows an analysis of the chronology of price movements and adjustments adopted since the beginning of the pandemic. The generalization of restrictive measures such as teleworking, the drop in tourist activity and the sudden cessation of economic activity, particularly during confinement, have led to a drastic drop in global demand for energy products. Global oil consumption thus fell by 22% between the end of 2019 and the start of the second quarter of 2020.
The initial discord between members of the Organization of the Petroleum Exporting Countries (OPEC) and their external OPEC+ partners over the supply cut has aggravated the situation of price instability. Indeed, Russia opposed, categorically, the proposal to lower daily world production by 1.5 million barrels and believed that the crisis of the epidemic would be temporary. This dissonance deepened the fall in the price of black gold on the financial markets, the barrel then lost 10% of its value. In response to the Russian refusal, Saudi Arabia cut prices by applying the tariff of 10.25 dollars per barrel.
These two major shocks simultaneously contributed to the plummeting of oil prices on the financial markets, a decline that was aggravated by the collapse in global demand. And it was not until May 1, 2020 that the OPEC+ countries concluded their historic agreement to reduce world production by 10%. According to information provided by the Hamburg Institute (HWWI), the food price index only fell by 9.3% between April 2019 and May 2020 compared to a spectacular drop of 60% in terms of energy products. The restrictive measures applied have had little effect on household consumption compared to industrial energy consumption. This deflation caused by the slowdown in supply and demand in Europe and the USA then had as its main channel the fall in the prices of energy and products indexed to oil such as diesel and domestic gas (Le Bayon and Peleraux, 2021). Similarly, the temporary VAT reduction measure, adopted by Germany between July and December 2020 to support household consumption, contributed to the decrease in prices in the Euro zone. It involved lowering the normal rate from 19% to 16% and lowering the reduced rate from 7% to 5%.
The year 2021 brought a great economic catch-up and reversed the recessionary trend of the year 2020. The prices of food raw materials increased by 55% while those of energy raw materials recorded a spectacular rebound of 330%. This strong upward trend in the prices of energy products is mainly due to the gradual reduction granted by OPEC+, a situation which has created a gap between supply and global demand. This increase in energy prices led to higher prices for fertilizers and grain products. Indeed, natural gas is an essential input for the production of ammonia, a common element of most nitrogen fertilizers. The FAO (Food and Agriculture Organization) index of food prices reached an average value of 140.7 points in February 2022, an increase of more than 20% compared to last year.
This dazzling increase is due to the rise in the price sub-indexes for vegetable oils, dairy products, cereal prices and meat. According to the Food and Agriculture Organization of the United Nations (FAO), these increases in food products are due to several factors, namely uncertainty over supplies from Ukraine and Russia, two main world wheat exporting countries. The organization also cites the prolonged drought that has affected cereal crops in the three main cereal producers in South America, including Argentina, Brazil and Paraguay. And finally, the FAO cites the increase in global demand and the appreciation of the currency of certain exporting countries as another factor that has contributed to the surge in prices. Moreover, and parallel to the imbalances between supply and demand, the quantity theory of money (Nicolas Copernicus and Jean Bodin) provides another explanation for the phenomenon of inflation. According to this theory, the increase in the money supply in circulation leads inexorably to rising prices. According to Milton Friedman, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can only be generated by an increase in the quantity of money faster than that of production”.
Moreover, for the Keynesians, the increase in the quantity of money in circulation brought about by an expansionist policy of the State with a view to curbing the crisis will induce two effects. A stimulating effect for the economy in the short term. However, this policy will generate inflation in the medium term due essentially to agents’ revision of their economic behavior. During the pandemic, the policy of central banks focused on the redemption of debts and the granting of direct aid generated, according to monetarists, a money supply without any real counterpart in the economy. In addition to the many aids and subsidies provided to businesses and households to limit the damage of the pandemic, the European Central Bank (ECB) has initiated the temporary emergency securities purchase program (Pandemic Emergency Purchase Programm, PEPP). This measure was launched on March 18, 2020 and has an overall envelope of 1.850 billion euros to be released in 4 installments, from March 2020 to March 2022. This is a so-called unconventional financial policy because the interest rates on which we can usually act to stimulate the economy are already low. The objective is then to inject liquidity into the eurosystem to revitalize the economy, in return for the purchase of securities previously issued by European companies and states. And since it is prohibited by European treaties to purchase debt directly from States on the secondary market, the ECB then credits the current accounts of European financial institutions with monetary creation equivalent to the value of the securities (PEPP).
At the accounting level, the securities purchased increase the assets of the ECB while the entries in the current accounts will become liabilities. The ECB has thus bought back nearly 80% of the Covid debts of the member countries by financing this operation by monetary creation, this is the famous expression of Jean Bodin’s “money printing”. Thus in the Euro zone, the rate of the M3 money supply increased from 5% to nearly 12% between 2019 and 2020. This increase illustrates an annual flow of 1.589 billion euros, this is the largest increase since the creation of the Euro. Similarly, in the USA the growth rate of the money supply reached 25% in 2020, almost double the highest rate ever reached since 1970. This strong growth is explained by the policy of transfers and aid to households and companies financed by monetary creation. The Treasury Department issued $4.582 billion in government securities in 2020. The Federal Reserve thus purchased $2.533 billion in Treasury bills. Morgan Stanley said, “The Fed may not have control over money supply growth, which means it also won’t have control over inflation, if it fires.” (Bulletin of the Banque de France, January-February 2022).
One thing is certain, the effects of the war in Ukraine and the economic sanctions exerted by Europe and the USA on Russia will create distrust and a domino effect for the international economy. The dedollarization orchestrated by Russia will probably be continued by China in order to end the hegemony exerted by the extraterritoriality of the American Dollar. Since the American boycott of the Olympic Games organized by Beijing and in retaliation, China has proceeded to the sale of nearly 6 billion dollars of American Treasury bonds. In addition, since the beginning of March 2022, talks between Saudi Arabia and China have converged on a possible acceptance of payment for Riyadh’s oil purchases in Yuan. At the same time, the massive sale of American Treasury bonds held by China, which currently amount to 1.062 billion dollars, will have very harmful effects on the American economy and the Dollar, not to mention the myriad of derivatives linked to Russian and Chinese assets and the collateral damage of multinational groups.
Par Sara Elouadi
Teacher-Researcher, University Hassan II Casablanca