The difficult equation of inflation

by Antonios Zairis*

A controversial issue for the whole (macro and micro) economy is the forecast for the evolution of inflationary pressures affecting the daily lives of all citizens. For the month of April 2022, according to ELSTAT measurements, inflation soared to 10.2%, an all-time high since February 1995. This was contributed by a 122.6% year-on-year increase in natural gas, 88.8% in electricity and 65.1% in heating oil. But a similar upward trend, in the comparable April 2022 and April 2021 changes, was also followed by basic foodstuffs - such as olive oil +22%, bread and cereals +10%, dairy products and eggs +11.7%, fruit and vegetables +18.6% and +13.8%, clothing and footwear +1.6%.

In addition, the high energy cost was a key reason for the revaluation of raw materials +145%, glass and bottles +70%, packaging, fertilizers, animal feed - resulting in the restriction of production and the rise in cost inflation, which due to the energy price increases is difficult to manage with painful consequences on the value chain and the competitiveness of Greek products seeking a "gateway" to international markets.

On the other hand, the antidote for a small increase in interest rates that is likely to be applied at the level of the European Union will certainly put the brakes on the growth dynamics of the economies. Nevertheless, it must be understood that inflation in this phase of the war in Ukraine is not coming from the demand side as it did in the pandemic crisis (inability of supply to meet the excess demand) but from the supply-production side which led to raw material price revaluations.

Therefore, in this particular case, monetary easing and fiscal expansion, which means giving money to stimulate demand, probably does not make sense.

However, the Government’s recent subsidies measures of up to 80% of the electricity price to businesses and households, and with retroactive effect, come to reverse the negative climate, restore the supply-demand balance and the pricing policy of businesses to previous competitive price levels, preventing the prospect of future increases and with the objective of ensuring the competitive operation of the market.

Recently, of course, several reputable economists have been warning and referring to the presence of a global phenomenon, "stagflation", which combines inflation and stagnation, i.e. weak economic growth with a simultaneous increase in unemployment and negative effects on the cost of living. The apparent concerns about energy price increases will put the brakes on global growth and force central banks to raise lending rates in order to control inflation at the expense of GDP.

The question remains how to react to all this in the global supply chain, which to a certain extent depends on the temporality or permanency of the coming difficulties. Time will tell!!

*Deputy Vice President of H.R.B.A, Assistant Professor of Business Administration at Neapolis University of Cyprus and member of the American Economic Association