Inflation remains one of the most important challenges for the global economy. Demand and supply shocks, supply chain issues, changes in fiscal and monetary policy, higher production costs, labor market shocks, geopolitical crises, and external instability, including wars and sanctions, cause higher prices. High inflation affects the well-being and expectations of the population, especially poorer groups, lowers economic growth, and causes social instability and political conflicts. Inflation surge remains one of the frequently discussed global consequences of the current geopolitical crisis. The Russian invasion of Ukraine substantially accelerated the dynamics of inflation, which started to increase in 2021. It is worth noting that both countries are important suppliers of raw materials such as energy, metals, and agricultural products. It is important to note that oil shocks fuel inflation expectations and dis-anchor the expectations of both consumers and price setters. Therefore, further increases in the price of the above-mentioned input factors can lead to higher operating and manufacturing costs, which in turn translates into higher prices and permanently higher inflation expectations [Seiler, 2022].
Before the pandemic, the global economy had low and stable inflation rates. During the pandemic period, consumer prices declined, while in the post-pandemic period prices surged and reached levels unseen for decades. Global lockdown led to a significant reduction of supply and demand, low volumes of production, and savings accumulation due to different fiscal support measures. Hence, the re-opening of the global economy brought a situation of fast-growing demand and slowly adjusting supply side, causing prices to increase. Evidence shows that price increases significantly affected inflation expectations. Therefore, a sudden rise in inflation of a single good or category could result in a surge in inflation expectations if that good is frequently purchased. This means that higher inflation expectations often result in higher consumer spending before prices increase. Moreover, workers may demand higher wages, which will increase costs of production, and firms, also under higher inflation expectations, are more likely to pass through cost increases into prices, which will result in even higher inflation. Currently, inflation is well above central bank inflation targets in almost all countries. Repeated inflationary shocks and a prolonged period of high inflation eventually de-anchors inflation expectations, marking a turning point after two decades of low and stable inflation [D’Acunto and Weber, 2022; Ha et al., 2022].
Headline inflation across the 19 countries that use the euro hit 10.7% in October 2022, the highest rate since the single European currency was introduced. In October, the annual rise of energy prices was 41.9%. The new measure of the European statisticians – the price of a cup of coffee, well illustrates growth in prices. Data shows that the price of a cup of coffee rose by almost a fifth (16.9%) in the year to August 2022, while the cost of coffee across the European Union (EU) increased by just 0.5% in the previous 12 months. Input prices for coffee surged significantly. For instance, the price of fresh whole milk was 24.3%, and low-fat milk was 22.2% higher across the EU in August 2022 than 12 months before. The EU price of sugar was 33.4% more expensive over the same period. By contrast, sugar prices only increased 0.8% between 2020 and 2021. It is worth noting that adding sugar to coffee in Poland is over 109% more expensive [Broom, 2022].
Higher inflation together with debt service is among the top challenges for the countries of Central Asia. According to the European Bank for Reconstruction and Development (EBRD), average inflation in the EBRD regions reached 16.5% in July, while in Central Asia the inflation was in the 10-16% range, way above the target corridors. High inflation reduces the well-being of many households and puts structural reforms and fiscal consolidation measures at risk. It is worth noting that inflation may not have peaked in the EBRD regions [Usov, 2022].
Figure 1 demonstrates dynamic inflation rates in Central Asian countries. The dynamics show that price increases, which started in 2021, continued in 2022. In 2021, the indicator of Turkmenistan was the highest and amounted to 15% (4.4% in 2010). Inflation in Kyrgyzstan equaled 11.9% (8% in 2010), in Uzbekistan – 10.8% (12.3% in 2010), in Tajikistan – 9% (6.5% in 2010), and in Kazakhstan – 8% (7.1% in 2010).
Figure 2 shows the average inflation in Central Asia, which was the lowest (7%) in 2015. In 2020, it reached 8.4% and increased to almost 13% in 2022.
Figure 1. Inflation rate in Central Asia, average consumer prices (annual percent change)
Source: The Author’s compilation based on the IMF (2022) data.
Figure 2. Average inflation in Central Asia, %
Source: The Author’s calculations based on the International Monetary Fund (2022) data.
According to the forecasts of the Asian Development Bank (2022), the average inflation in 2022 in the Caucasus and Central Asia will achieve 11.5%, decreasing to 7.1% in 2023. The Bank notes that the surge in food and energy prices caused higher inflation in the region. In Kazakhstan, in the first 7 months of 2022, food price increases amounted to 16%, for other goods – 11.2%, and for services – 8.4%. Supply chain disruption from food export bans imposed by Russia led to shortages of staple foods and jumps in prices of 52.6% for sugar and 22.8% for wheat. In Kyrgyzstan and Tajikistan, during the reported period, prices rose by 12.6% and 9.6% for food, 5.6% and 6.6% for other goods, and 4.9% and 8.4% for services, respectively. In Uzbekistan, despite higher costs for imported food and capital goods, rising wages and pensions, and price deregulation for domestic wheat, inflation decelerated slightly to 10.6% in the first half of 2022 from 10.9% a year earlier. The government implemented policies to stabilize food prices, in particular, exemption of tax and customs duties on essential foodstuffs until the end of 2022. As a result, food inflation slowed to 14.2% from 15.5% a year earlier. However, inflation for other goods increased from 8.6% to 9%, while for services slowed from 8.4% to 6.6% as planned energy tariff increases were postponed.
The International Monetary Fund (2022a) shows that to fight inflation, central banks need to normalize balance sheets, and raise real policy rates above their neutral level fast enough and for long enough to keep inflation and inflation expectations under control. Fiscal policy also needs to support monetary policy in softening demand in economies with excess aggregate demand and overheating labor markets. Authorities should take into consideration that supply-side efforts can support monetary policy in reducing inflation. In the conditions of tight supply, increases in government expenditure or tax cuts will only push inflation up further. Consequently, price instability may put at risk all government efforts to increase economic growth rates. Moreover, increasing costs of living may put the most vulnerable members of society at risk as poorer households often spend relatively more than others on food, heating, and fuel – categories that have seen particularly steep price increases. While developing policies to protect vulnerable groups of society, policymakers need to take into account that broad price caps or food and energy subsidies should be avoided, as they increase demand while diminishing or removing supply incentives.
Monetary authorities of almost all Central Asian countries responded with higher interest rates. However, fiscal authorities, in turn, propose and plan different policies to fight inflation and mitigate its consequences.
At a meeting with the heads of diplomatic missions, President of Kazakhstan Kassym-Jomart Tokayev noted that the demonopolization of the economy is a national priority for Kazakhstan. In his speech, the President focused on Kazakhstan’s contribution to ensuring regional and global food security. According to the President, Kazakhstan is among the top 10 largest exporters of grain crops, annually supplying more than 5 million tons of wheat and 1.5 million tons of flour. Moreover, Kazakhstan is one of the largest producers of flax seeds and exporters of oilseeds. At the same time, the country is concerned about the persistently high level of food imports from abroad, which leads to high inflation. The President concluded that experts rightly admitted that inflation in Kazakhstan was of foreign origin [Forbes, 2022].
At the same time, the Prime Minister of Kazakhstan Alikhan Smailov held a meeting on the prices for socially significant food products, where the First Vice Minister of Trade and Integration Arman Shakkaliyev reported that food inflation for 10 months of 2022 reached 20.5%. To stabilize prices for a wide range of food products, it is planned to work out the issue of reducing the cost of grain, fodder, and sunflower oil. He also mentioned that in recent years, some producers made public statements in the press about the upcoming price increases. As a result, Shakkaliyev called for an urgent antitrust policy and appropriate response to public statements of the producers. Minister of Agriculture Yerbol Karashukeev reported that some commodity producers asked to increase the amount of government subsidies. The Prime Minister responded that in 2022 the government doubled subsidies for agriculture, but those who received them increased food prices by 20%. The Prime Minister expressed dissatisfaction with this situation and called for producers to take counter obligations to make the subsidy system work well. Smailov concluded that ministries and akimats have all the necessary tools, financial resources, and control functions to regulate the cost of socially significant food products, but there is still no expected effect from the work of regional commissions to investigate pricing chains, whose activities were instructed to be reformatted, and the database on vegetable stores has not been updated. He pointed at the weak work of akimats and insufficient coordination on the part of the ministries of agriculture, trade and integration and instructed for the improper performance of their duties to bring to disciplinary responsibility the supervising deputy akims of these regions [Atameken Business, 2022].
Thus, based on the meeting of the government of Kazakhstan, and taking into consideration the similarity of the situation in Central Asia, we can develop the following recommendations. Firstly, it is important to determine the origins of inflation. While the President of Kazakhstan points out the role of imports, the government of Kazakhstan mainly focuses on intermediaries, public statements of producers, and other local issues. In fact, there is a need for comprehensive research, which will assess the contributions of all factors and policies, including trade, monetary and fiscal measures, external shocks, etc. Secondly, there is a need for policy coordination between monetary and fiscal authorities and within fiscal policy. Thirdly, policy implementation, including supply-side measures, should be based on analytical and empirical research, and theoretical findings are also important as in the case of subsidies. Fourth, the role of local authorities remains important, but not in fighting with producers or administrative price controls, but in the development of businesses to increase volumes of output. Finally, structural reforms should take into consideration all future shocks. Implementation of these policies can help the governments of Central Asia reduce inflation, achieve higher economic growth and increase the well-being of the population.
References:
Asian Development Bank (2022). Asian Development Outlook 2022. Update. Entrepreneurship in the digital age. Retrieved from https://www.adb.org/sites/default/files/publication/825166/ado2022-update.pdf. Accessed on 15.10.2022.
Atameken Business (2022). Smailov said, because of whom food prices are rising in Kazakhstan. Retrieved from https://inbusiness.kz/ru/last/smailov-skazal-iz-za-kogo-v-kazahstane-rastut-ceny-na-produkty. Accessed on 08.11.2022.
Broom, Douglas (2022). Inflation in Europe: Could your morning coffee become a ‘luxury’? Retrieved from https://www.weforum.org/agenda/2022/11/europe-inflation-coffee-cup/. Accessed on 10.11.2022.
D’Acunto, Francesco and Michael Weber (2022). Rising inflation is worrisome. But not for the reasons you think. Retrieved from https://cepr.org/voxeu/columns/rising-inflation-worrisome-not-reasons-you-think. Accessed on 05.11.2022.
Forbes (2022). Tokayev: Inflation in Kazakhstan is of foreign origin. Retrieved from https://forbes.kz/finances/tokaev_inflyatsiya_v_kazahstane_imeet_inostrannoe_proishojdenie/. Accessed on 10.11.2022.
Ha, Jongrim, Kose Ayhan and Franziska Ohnsorge (2022). Today’s inflation and the Great Inflation of the 1970s: Similarities and differences. Retrieved from https://cepr.org/voxeu/columns/todays-inflation-and-great-inflation-1970s-similarities-and-differences. Accessed on 05.11.2022.
International Monetary Fund (2022). Inflation rate, average consumer prices. Retrieved from https://www.imf.org/external/datamapper/PCPIPCH@WEO/OEMDC/ADVEC/WEOWORLD. Accessed on 15.11.2022.
International Monetary Fund (2022a). World Economic Outlook 2022. Countering the Cost-of-Living Crisis. Retrieved from https://www.imf.org/en/Publications/WEO/Issues/2022/10/11/world-economic-outlook-october-2022#:~:text=COUNTERING%20THE%20COST%2DOF%2DLIVING%20CRISIS,-OCTOBER%202022&text=Global%20growth%20is%20forecast%20to,of%20the%20COVID%2D19%20pandemic. Accessed on 15.11.2022.
Seiler, Pascal (2022). The Ukraine war has raised long-term inflation expectations. Retrieved from https://cepr.org/voxeu/columns/ukraine-war-has-raised-long-term-inflation-expectations. Accessed on 12.11.2022.
Usov, Anton (2022). Central Asia shows strong resilience to geopolitical turmoil. Retrieved from https://www.ebrd.com/news/2022/central-asia-shows-great-resilience-to-geopolitical-turmoil-.html#:~:text=Regional%20inflation%20remains%20high%2C%20up%20to%2016%20per%20cent&text=The%20EBRD%20is%20expecting%20the,revision%20of%20its%20spring%20forecast. Accessed on 11.11.2022.
Note: The views expressed in this blog are the author’s own and do not necessarily reflect the Institute’s editorial policy