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Next Previous The derailment of inflation HOME • INSIDER • CYPRUS
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The Russian invasion of Ukraine and the raging war have a double impact on the economy. On the one hand, they fuel inflation mainly through the spike in energy prices and certain foods and other raw materials, on the other hand, they slow down the growth of the economy to 4%, from 1.5% of the initial estimate, the ministry revised the inflation forecast for 2022. due to the upward trend in oil prices in the midst of the Ukrainian crisis.
READ ALSO: & nbsp; How steadily high inflation will change our lives
The annual inflation of the European Union in February 2022 reached 6.2%, from 5.6% in January . A year earlier, EU annual inflation was at 1.3% .Inflation had started in September 2021.
Russia's economy is already shrinking under Western sanctions, but Moscow is prepared to do whatever it takes to lead the US and Europe into recession, sending energy, grain and metals prices even higher. There are four reasons to expect increased inflationary pressures:
ENERGY PRICES
The first is energy prices. Both oil and gas prices have risen to very high levels since the start of the war in Ukraine. With the sanctions imposed, the European Union should reduce gas imports from Russia. This also means a reduction in the total & nbsp; demand. To the extent that this cannot happen in the next 12 months or so, the European Union is still dependent on Russia.
INTEREST RATES
Secondly, in the face of high inflation and the uncertainty caused by the war, the European Central Bank must reconsider its plans. Markets expected the ECB to pave the way for interest rate hikes by the end of the year. Given the current circumstances and how rapidly they are changing, its policies must continue to be expansionary to address the uncertainty caused by the war. So not only will there be higher prices for longer, but the ECB will help.
FINANCIAL POLICY
Third, fiscal policy will be expansive, albeit in a different way than during the pandemic. The two categories are military spending and household support to cope with the energy burden.
Fourth, in addition to military spending, fiscal policy will have to deal with very high energy prices. As energy prices continue to rise and put a heavy burden on the inflation basket, we can expect further support measures. As inflation now becomes entrenched, the risk is now real and immediate. The risk of stagnant inflation in Europe is very high. In addition, the risk of a new debt crisis in Europe in the next 1-2 years is also high. On the one hand, public debt levels in some Eurozone countries are worse today than they were when the previous debt crisis erupted, and on the other, high inflation will make it difficult for the ECB to restart its bond-buying program.
In this time of uncertainty, the ECB is considering three scenarios for inflation and growth.
THE THREE SCENARIO
The basic scenario, based on the assumption that the current disruptions in energy supplies and the negative impact on confidence due to the war in Ukraine will be temporary and that the supply chains, forecasts average inflation of 5.1% for 2022 and growth of 3.7%.
The second scenario, which is the unfavorable one, is based on the assumption that stricter sanctions will be imposed on Russia, which will lead to some disruptions in the supply chains. In this case, inflation would be 5.9% in 2022 and growth at 3.5%.
In the third and worst case scenario, which assumes a stronger reaction of energy prices to larger reductions in supply, inflation would reach 7.1% this year and GDP growth would be limited to 2.3%.
With the baseline scenario, inflation for 2023 stands at 2.1%, while with the unfavorable and the most unfavorable scenario at 2% and 2.7%, respectively.
Vicious CYCLE OF INCREASES
The problem of inflation is more important from the slowdown in growth. If inflation is not addressed immediately, developments in the medium term and for growth will be more unfavorable. If expectations of high inflation are entrenched in the economy and society in the medium term, then there will be a vicious cycle of price increases that will have significant costs for economies.
From the April issue of Forbes
