On either side of the Atlantic, inflation is affecting many nations, with the developing economies of Central and Eastern Europe bearing the brunt of the global supply chain crisis along with high energy costs.
Lithuania posted one of the highest annual inflation rates recorded with 8.2 percent, while Estonia registered 6.8 percent, Hungary 6.6 percent, Poland 6.4 percent, and powerhouse Germany expected to pass the five percent threshold this month. The price of daily products like food and fuel have gone up, and people are finding it increasingly difficult to maintain the same quality of life as before the pandemic.
“We’ve noticed that we’re consuming less,” Gabor Pardi, a shopper in Hungary’s capital, Budapest, said to AP. “We try to shop for the cheapest and most economical things, even if they don’t look as good.”
Economic downturn from the COVID-19 pandemic-related lockdowns and other restrictions, which led to lower investments with entire workforces debilitated resulted in handicapping the world’s economies.
To regain the pre-pandemic momentum, economies like the United States injected trillions of dollars in domestic aid along with economic mobilization drives that haven’t been seen since World War II.
The Federal Reserve, meanwhile, maintained a low interest rate to revive businesses. But this sudden series of actions had unintended consequences as a spike in demand overran supply, and global distribution networks could not keep pace with renewed customer demands.
The COVID-19 situation has not subsided in many parts of China, which means that manufacturing facilities can not meet delivery timelines. Combined with labor shortages, the global supply chains began to get squeezed, and prices for daily commodities gradually rose in conjunction.
According to the International Monetary Fund, world consumer prices will rise 4.3 percent in 2021, a level not seen in a decade.
These effects were felt acutely in developing central and eastern European nations, and they were hit hard when local currencies lost their value against the dollar. This pushed up prices for food and gasoline, exacerbating the supply chain shortages.
Government Subsidies in Poland and Hungary
During the last six months, Hungary’s currency, the forint, lost almost 16 percent of its value against the U.S. dollar. Prices of goods shot up drastically.
As a temporary relief for three months, the Hungarian government announced a 480 forint ($1.50) cap for a liter of fuel at filling stations. The national average is $1.59 for gasoline and $1.61 for a liter of diesel. The prices have increased more than 50 percent when compared to last year.
In neighboring Poland, Mateusz Morawiecki, the prime minister, said on Nov. 25 that the government will cut taxes on essentials, and provide financial assistance to households through a $2.4 billion scheme designed to offset inflationary effects.
Poland is under inflation levels not seen in two decades and the government is essentially trying to buffer its impact through measures like lowering tax on petrol, and the value-added taxes on gas and electricity. Polish households will also receive around $96-$276 in two installments starting next year.
To lower inflation levels, the government will begin raising interest rates. The recent 75 basis point increase, which was the second increase in two months, was higher than what economists predicted, and is expected to clamp down on increasing prices.
The National Bank of Poland’s decision was echoed by central banks in the Czech Republic, Hungary, and Romania to reign in rising inflation in their respective economies.
“The National Bank of Poland’s decision . . . alongside the upwards revision to its inflation forecast suggests to us that the NBP is taking the fight against inflation much more seriously than we had thought,” Liam Peach, an economist at Capital Economics, said to FT.
However, according to Carmen Reinhart, chief economist at the World Bank, if central banks all move to hike rates aggressively, it will have an adverse effect on economic recoveries.