tag:theconversation.com,2011:/us/topics/consumer-prices-38946/articlesConsumer prices – The Conversation2023-01-27T13:28:35Ztag:theconversation.com,2011:article/1977812023-01-27T13:28:35Z2023-01-27T13:28:35ZRural Americans aren’t included in inflation figures – and for them, the cost of living may be rising faster<figure><img src="https://images.theconversation.com/files/506645/original/file-20230126-35008-bhni7n.jpg?ixlib=rb-1.1.0&rect=0%2C49%2C5481%2C3065&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Calculating the cost of living in the country.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/black-farmer-with-digital-tablet-in-crop-field-royalty-free-image/463245219?phrase=rural%20america&adppopup=true">Ariel Skelley/Getty Images</a></span></figcaption></figure><p>When the Federal Reserve <a href="https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm">convenes at the end of January 2023</a> to set interest rates, it will be guided by one key bit of data: the <a href="https://www.bls.gov/cpi/">U.S. inflation rate</a>. The problem is, that stat ignores a sizable chunk of the country – rural America.</p>
<p>Currently <a href="https://www.bls.gov/news.release/cpi.nr0.htm">sitting at 6.5%</a>, the rate of inflation is still high, even though it has fallen back slightly from the end of 2022.</p>
<p>The overall inflation rate, along with core inflation – which strips out highly volatile food and energy costs – is <a href="https://www.federalreserve.gov/faqs/economy_14419.htm">seen as key</a> to knowing whether the economy is heating up too fast, and guided the Fed as it imposed <a href="https://www.cnbc.com/2022/11/02/fed-hikes-by-another-three-quarters-of-a-point-taking-rates-to-the-highest-level-since-january-2008.html">several large 0.75 percentage point interest rate</a> increases in 2022. The hope is that raising the benchmark rate, which in turn increases the costs of taking out a bank loan or mortgage, for example, will help reduce inflation back to the Fed target of around 2%.</p>
<p>But the main indicator of inflation, the consumer price index, is compiled by looking at the changes in price <a href="https://www.bls.gov/opub/hom/cpi/">specifically urban Americans</a> pay for a set basket of goods. Those living in rural America are not surveyed.</p>
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<p>As <a href="https://newsmediarelations.colostate.edu/contacts/stephan-weiler/">economists who study</a> <a href="https://aae.wisc.edu/faculty/tconroy2/">rural America</a>, we believe this poses a problem: People living outside America’s cities represent <a href="https://www.pewresearch.org/social-trends/2018/05/22/demographic-and-economic-trends-in-urban-suburban-and-rural-communities/">14% of the U.S. population</a>, or around 46 million people. They are likely to face different financial pressures and have different consumption habits than urbanites.</p>
<p>The fact that the Bureau of Labor Statistics surveys only urban populations for the consumer price index makes assessing rural inflation much more difficult – it may even be masking a <a href="https://www.agupdate.com/midwestmessenger/news/state-and-regional/inflation-broadens-financial-gap-between-rural-urban-communities/article_c05ea318-3772-11ed-ab7f-23ca4e507a3d.html">rural-urban inflation gap</a>.</p>
<p>To assess if such a gap exists, one needs to turn to other pricing data and qualitative analyses to build a picture of price growth in nonurban areas. We did this by focusing on four critical goods and services in which rural and urban price effects may be significantly different. What we found was rural areas may indeed be suffering more from inflation than urban areas, creating an underappreciated gap.</p>
<h2>1. The cost of running a car in the country</h2>
<p>Higher costs related to cars and gas can contribute to a urban-rural inflation gap, severely eating into any discretionary income for families outside urban areas, a <a href="https://smalltowns.soc.iastate.edu/wp-content/uploads/sites/163/2022/07/STR1063.pdf">2022 report found</a>.</p>
<p>This is likely related to there being considerable differences in <a href="https://www.bls.gov/opub/ted/2016/urban-and-rural-household-spending-in-2015.htm">vehicle purchases</a>, <a href="https://www.ers.usda.gov/webdocs/publications/42593/30151_aib795full_002.pdf?v=41262">ownership</a> and <a href="https://journals.sagepub.com/doi/abs/10.1177/08912424221145173?journalCode=edqa">lengths of commutes</a> between urban and rural Americans.</p>
<p>Car ownership is integral to rural life, essential for getting from place to place, whereas urban residents can more easily choose cheaper options like public transit, walking or bicycling. This has several implications for expenses in rural areas.</p>
<p>Rural residents spend more on car purchases out of necessity. They are also <a href="https://www.bls.gov/cex/anthology/csxanth8.pdf">more likely to own a used car</a>. During the first year of the COVID-19 pandemic, there was a <a href="https://www.whec.com/archive/consumer-alert-used-car-prices-skyrocketing-due-to-covid-19/">huge increase in used car prices</a> as a result of a lack of new vehicles due to supply chain constraints. These price increases likely affected remote areas disproportionately. </p>
<p>Rural Americans tend to drive farther as part of their day-to-day activities. Because of greater levels of isolation, rural workers are often required to make longer commutes and drive farther for child care, with the proportion of those traveling 50 miles (80 kilometers) or more for work <a href="https://journals.sagepub.com/doi/full/10.1177/08912424221145173">having increased over the past few years</a>. In upper Midwest states as of 2018, nearly 25% of workers in the most remote rural counties commute 50 miles (80 kilometers) or more, compared with just over 10% or workers in urban counties.</p>
<p>Longer journeys mean cars and trucks will wear out more quickly. As a result, rural residents have to devote more money to repairing and replacing cars and trucks – so any jump in automotive inflation will hit them harder.</p>
<p>Though fuel costs can be volatile, periods of high energy prices – such as the one the <a href="https://www.cnn.com/2022/12/29/energy/oil-gas-prices-2022/index.html#:%7E:text=Fuel%20prices%20in%202022%20were,a%20recent%2018%2Dmonth%20low.">U.S. experienced through much of 2022</a> – are likely to disproportionately affect rural residents given the necessity and <a href="https://wolfstreet.com/2021/08/13/miles-driven-in-america-show-the-shifts-brought-on-by-the-pandemic-rural-is-in-urban-not-so-much-mass-transit-is-out/">greater distances of driving</a>. Anecdotal evidence also suggests <a href="https://www.marketplace.org/2022/08/30/in-rural-areas-the-high-cost-of-diesel-is-driving-up-the-cost-of-doing-business/">gas prices can be</a> <a href="https://www.wqow.com/news/you-ask-we-answer/you-ask-we-answer-why-are-gas-prices-sometimes-higher-in-rural-areas/article_607a2f3e-abc3-11ec-b4eb-db25ebbc791a.html">higher in rural communities</a> than in urban areas.</p>
<h2>2. Rising cost of eating at home – and traveling for groceries</h2>
<p>As eating away from home becomes more expensive, many households may choose to eat in more often to cut costs. But rural residents <a href="https://www.bls.gov/opub/ted/2016/urban-and-rural-household-spending-in-2015.htm">already spend a larger amount on eating at home</a> – likely due in part to the slimmer choices available for eating out.</p>
<p>This means they have less flexibility as food costs rise, particularly when it comes to essential grocery items for home preparation. And with the annual inflation of the price of groceries <a href="https://www.bls.gov/news.release/cpi.nr0.htm">outpacing the cost eating out</a> – 11.8% versus 8.3% – dining at home becomes comparably more expensive.</p>
<p>Rural Americans also do more driving to get groceries – the median rural household travels <a href="https://www.ers.usda.gov/webdocs/publications/93141/eib-209.pdf?v=9472.3">3.11 miles</a> (5 kilometers) to go to the nearest grocery store, compared with 0.69 miles (1.1 kilometers) for city dwellers. This creates higher costs to feed a rural family and again more vehicle depreciation.</p>
<p>Rural grocery stores are also <a href="https://www.ers.usda.gov/amber-waves/2021/december/rural-counties-losing-share-of-grocery-stores-gaining-other-types-of-food-retailers/">dwindling in number, with dollar stores taking their place</a>. As a result, fresh food in particular can be scarce and expensive, which leads to a more limited and unhealthy diet. And with <a href="https://www.bls.gov/news.release/cpi.nr0.htm">food-at-home prices rising faster than prices at restaurants</a>, the tendency of rural residents to eat more at home will see their costs rising faster.</p>
<h2>3. The cost of growing old and ill outside cities</h2>
<p>Demographically, <a href="https://www.census.gov/library/stories/2019/10/older-population-in-rural-america.html">rural counties trend older</a> – part of the effect of younger residents migrating to cities and college towns for either work or educational reasons. And older people spend more on <a href="https://www.bls.gov/opub/ted/2016/urban-and-rural-household-spending-in-2015.htm">health insurance and medical services</a>. Medical services overall have been rising in cost too, so those older populations will be spending more for vital doctors visits.</p>
<p>Again with health, any increase in gas prices will disproportionately hit rural communities more because of the extra travel needed to get even primary care. On average, rural Americans travel <a href="https://www.pewresearch.org/fact-tank/2018/12/12/how-far-americans-live-from-the-closest-hospital-differs-by-community-type/">5 more miles</a> (8 kilometers) to get to the nearest hospital than those living in cities. And specialists may be hundreds of miles away.</p>
<h2>4. Cheaper home costs, but heating and cooling can be expensive</h2>
<p>Rural Americans aren’t always the losers when it comes to the inflation gap. One item in rural areas that favors them is housing. </p>
<p>Outside cities, <a href="https://brandondonnelly.com/2016/02/10/urban-suburban-and-rural-home-prices-in-the-us/">housing costs are generally lower</a>, because of more limited demand. <a href="https://www.census.gov/library/stories/2017/09/rural-home-ownership.html">More rural Americans own their homes</a> than city dwellers. Since owning a home is generally cheaper than renting during a time of rising housing costs, this helps insulate homeowners from inflation, especially as housing prices soared in 2021.</p>
<p>But <a href="https://www.bls.gov/opub/ted/2016/urban-and-rural-household-spending-in-2015.htm">even renters in rural America spend proportionately less</a>. With housing <a href="https://www.cnbc.com/2022/11/14/heres-why-it-may-take-a-while-for-housing-inflation-to-cool-off.html">making up around a third</a> of the consumer price index, these cost advantages work in favor of rural residents.</p>
<p>However, poorer-quality housing leaves rural homeowners and renters <a href="https://smalltowns.soc.iastate.edu/wp-content/uploads/sites/163/2022/07/STR1063.pdf">vulnerable to rising heating and cooling costs</a>, as well as additional maintenance costs.</p>
<h2>Inflation – a disproportionate burden</h2>
<p>While there is no conclusive official quantitative data that shows an urban-rural inflation gap, a review of rural life and consumption habits suggests that rural Americans suffer more as the cost of living goes up.</p>
<p>Indeed, rural inflation may be more pernicious than urban inflation, with price increases likely lingering longer than in cities.</p><img src="https://counter.theconversation.com/content/197781/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stephan Weiler receives funding from the US Economic Development Administration. He is affiliated with the Regional Economic Development Institute (REDI@CSU). </span></em></p><p class="fine-print"><em><span>Tessa Conroy receives funding from the United States Department of Commerce Economic Development Administration in support of Economic Development Authority University Center (Award No. ED21CHI3030029 and CARES Act award no. ED20CHI30700477). Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of the U.S. Department of Commerce Economic Development Administration.</span></em></p>The rising cost of living doesn’t hit all Americans equally. Yet the benchmark figure for charting the rising cost of living excludes people in rural areas.Stephan Weiler, Professor of Economics, Colorado State UniversityTessa Conroy, Economic Development Specialist, University of Wisconsin-MadisonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1970882023-01-03T13:30:08Z2023-01-03T13:30:08ZGlobal economy 2023: Why central banks face an epic battle against inflation amid political obstacles<figure><img src="https://images.theconversation.com/files/502929/original/file-20230103-18-esxi1g.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">This could get ugly. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-vector/bull-vs-bear-on-stock-market-414654091">Shutterstock/Nataletado</a></span></figcaption></figure><p><em>Where is the global economy heading in 2023? After all the challenges of last year, it’s a question we ask with trepidation. Just as the economy was dealing with the ongoing effects of the COVID-19 pandemic, Russia’s invasion of Ukraine in February ramped up inflation.</em></p>
<p><em>Significant rises in the cost of vital items such as food and energy created a cost of living crisis that has engulfed households and businesses. Central banks reacted with a raft of interest-rate hikes, while a wave of industrial action saw workers in many countries fighting for pay and conditions to keep pace with this new economic era.</em> </p>
<p><em>Now, as we enter 2023, these conditions are set to continue, and the IMF thinks that a third of the world will experience a recession in the coming months.</em></p>
<p><em>To help you make sense of the way ahead, our international network has put together a series of expert briefings on the global economy in 2023. Publishing over the next few days, they will include reports on the cost of living crisis and industrial action, and deep dives into key areas like energy, food and the global supply chain.</em></p>
<p><em>Today’s article kicks us off by looking at where next for inflation, interest rates and economic growth.</em></p>
<hr>
<p>Some of the world’s biggest economies – and their central banks – face a tricky task this year taming inflation via higher interest rates without triggering a recession. </p>
<p>And whether they like it or not, the U.S. Federal Reserve, the Bank of England and other central banks are now being thrust into the center of a political debate that could threaten their independence as well as their ability to act decisively to curb rising prices. </p>
<p><a href="https://www.city.ac.uk/about/people/academics/steve-schifferes">I’ve been following and covering politics and finance</a> for four decades as a reporter and now as an economics research fellow. I believe there are two key ways politics may interfere with central bank plans in 2023. </p>
<h2>An inflationary challenge</h2>
<p>High inflation is perhaps the biggest challenge facing the world economy over the coming year.</p>
<p>Inflation has rapidly accelerated and <a href="https://www.pewresearch.org/fact-tank/2021/11/24/inflation-has-risen-around-the-world-but-the-u-s-has-seen-one-of-the-biggest-increases/">is now at or near its highest rate</a> in decades in most developed economies like the U.S. and in Europe, causing <a href="https://www.imf.org/en/Publications/WEO/Issues/2022/10/11/world-economic-outlook-october-2022">living standards to stagnate or decline</a> in many countries. This has particularly hurt the poorest people, who suffer a <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/articles/inflationandthecostoflivingforhouseholdgroups/october2022">higher rate of inflation</a> than the general population because they spend more of their income on food and energy.</p>
<p>The sharp rise in inflation caught central banks by surprise after <a href="https://www.yahoo.com/video/past-two-decades-low-inflation-173230207.html">two decades of low and stable inflation</a>. They reacted by aggressively raising interest rates in the second half of 2022, with the Fed leading the way. The U.S. central bank <a href="https://www.federalreserve.gov/monetarypolicy/openmarket.htm">lifted rates 4.25 percentage points</a> over a six-month period, and the <a href="https://www.reuters.com/markets/global-central-banks-deliver-historic-rate-hike-blast-2022-2022-12-23/">Bank of England, the European Central Bank and others</a> followed in its footsteps. </p>
<p>Their strategies seem to be working. <a href="https://www.bls.gov/news.release/cpi.nr0.htm">Inflation in the U.S.</a> has slowed, while <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/november2022">in the U.K.</a> and <a href="https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Inflation_in_the_euro_area#Euro_area_annual_inflation_rate_and_its_main_components">the eurozone</a>, recent data suggests inflation may have peaked – although it’s still very high, at around 10% – and might start trending down.</p>
<p>But interest rate hikes – which are expected to continue in 2023, albeit at a slower pace – could further cloud the outlook for economic growth, which already looks grim for developed economies.</p>
<p>The Organization for Economic Cooperation and Development predicts that in 2023 both the U.S. and the eurozone <a href="https://www.oecd.org/economic-outlook/november-2022/">will grow by only 0.5%</a>, well below their historic averages, while Europe’s largest economy, Germany, will actually shrink by 0.3%. In the U.K., the <a href="https://www.bankofengland.co.uk/monetary-policy-report/2022/november-2022">Bank of England projects</a> that the economy will continue to shrink until the middle of 2024.</p>
<h2>Fiscal spending and inflation</h2>
<p>That brings us to the first political problem that could upset central bank plans: government spending. </p>
<p>The politics is playing out in different ways. In the U.S., spending has increased substantially, most notably with the <a href="https://www.whitehouse.gov/bipartisan-infrastructure-law/">$1.2 trillion infrastructure bill</a> signed into law in late 2021 and the $1.7 trillion budget bill passed in December.</p>
<p>This kind of expansionary fiscal policy, which may be in place for years, could undermine attempts by central banks like the Fed to fight inflation. As the central banks seek to reduce inflation by curbing demand, <a href="https://www.ecb.europa.eu/events/pdf/conferences/Galietal.pdf">increased government spending has the opposite effect</a>. This could force the Fed and other banks to raise rates even higher than they otherwise would have.</p>
<p>In Europe and the U.K., governments <a href="https://www.cnn.com/2022/09/08/business/liz-truss-energy-price-cap-europe/index.html">have been forced to spend billions</a> to subsidize the energy bills of consumers and businesses, while the economic slowdown has reduced their tax revenue, leading to soaring government deficits</p>
<p>Nevertheless, in the U.K. the <a href="https://www.gov.uk/government/news/chancellor-delivers-plan-for-stability-growth-and-public-services">Conservative government has prioritized the fight against inflation</a>, announcing cutbacks to consumer subsidies for energy, plus higher taxes and further cuts in public spending if it wins the next general election, which is expected to take place in 2024. While these actions are deflationary, they are <a href="https://yougov.co.uk/topics/politics/articles-reports/2022/12/16/voting-intention-con-23-lab-48-14-15-dec-2022">politically unpopular</a>.</p>
<p>The Bank of England is now split on whether, or how fast, to <a href="https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2022/december-2022">continue to raise rates</a>. </p>
<figure class="align-center ">
<img alt="Two white women hold up signs, one reading 'nurses running on empty, SOS,' in front of a brick building" src="https://images.theconversation.com/files/502855/original/file-20230102-16-5qi3nt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/502855/original/file-20230102-16-5qi3nt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=405&fit=crop&dpr=1 600w, https://images.theconversation.com/files/502855/original/file-20230102-16-5qi3nt.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=405&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/502855/original/file-20230102-16-5qi3nt.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=405&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/502855/original/file-20230102-16-5qi3nt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=508&fit=crop&dpr=1 754w, https://images.theconversation.com/files/502855/original/file-20230102-16-5qi3nt.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=508&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/502855/original/file-20230102-16-5qi3nt.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=508&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The inflation crisis is increasingly turning political as workers strike over wages not matching the soaring cost of living.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/BritainStrikes/dab904e651eb4ae4b22e507babc01bf1/photo?Query=strike%20nurses%20uk&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=87&currentItemNo=20">AP Photo/Kirsty Wigglesworth</a></span>
</figcaption>
</figure>
<h2>Central bank independence under threat</h2>
<p>The other political problem is more existential for central banks and makes their task all the more delicate. </p>
<p>For the past 20 years, their independence from government interference and the setting of public inflation targets at around 2% <a href="https://www.cato.org/cato-journal/winter-2020/fresh-look-central-bank-independence">have helped them gain credibility</a> in fighting inflation, which stayed at historic lows for much of the 21st century. </p>
<p>Now both their credibility and independence may be under threat.</p>
<p>Central bankers, especially in Europe, are acutely aware of public concerns about how <a href="https://www.pbs.org/newshour/economy/inflation-in-europe-likely-to-increase-more-interest-rate-hikes-likely-warns-central-bank-president">higher interest rates might stifle growth</a>, in part because their economies have been more severely affected than the U.S. by the Ukraine war. Meanwhile, consumers are being hit by higher mortgage payments, which may <a href="https://www.ft.com/content/76e8b499-2381-463d-ac6d-9d3507f150c3">tank the housing market</a>.</p>
<p>At the same time, central bank efforts to persuade workers <a href="https://www.bbc.co.uk/news/business-60206564">not to ask for higher wages</a> to compensate for inflation, which would help reduce the need for more interest rate hikes, have spectacularly backfired, especially in Britain, where a <a href="https://www.ft.com/content/f5123b82-84a5-4af4-93e9-420803b8128f">wave of strikes</a> by public-sector workers shows no sign of abating.</p>
<p>Long-standing <a href="https://www.sciencedirect.com/science/article/abs/pii/S0176268022000234">political tensions</a> over the role of the European Central Bank have been exacerbated by the election of <a href="https://www.reuters.com/markets/europe/italy-minister-takes-swipe-ecb-after-policy-moves-hit-markets-2022-12-15/">right-wing governments</a> in <a href="https://www.pewresearch.org/fact-tank/2022/10/06/populists-in-europe-especially-those-on-the-right-have-increased-their-vote-shares-in-recent-elections/">several eurozone countries</a>. </p>
<p>Traditionally, under the influence of Germany’s Bundesbank, the European Central Bank has <a href="https://www.bundesbank.de/en/press/interviews/-inflation-is-one-of-the-biggest-worries-for-germans-at-the-moment--899798">worried about inflation</a> more than other central banks. Under competing political pressures, it has moved more slowly than some other central banks to unwind its policy of low – and even negative – interest rates.</p>
<p>On the other side of the Atlantic, where Fed Chief Jerome Powell <a href="https://apnews.com/article/inflation-business-prices-jerome-powell-government-and-politics-9e7fed8f82ffbe9af205ec969e6277af">has rejected any attempt</a> to mitigate his focus on inflation, political pressures may grow from <a href="https://thehill.com/policy/finance/3714503-democrats-tell-fed-chief-rate-hikes-disregard-working-families/">both left</a> and right, particularly if <a href="https://www.wsj.com/articles/trump-steps-up-attacks-on-fed-chairman-jerome-powell-1540338090">Donald Trump</a> becomes the Republican presidential nominee. This ultimately <a href="https://kelo.com/2022/12/21/republican-senators-propose-overhaul-of-federal-reserve-amid-concerns-about-politics/">may lead Congress or a new administration</a> to try to change the central bank’s approach, its leadership and even its mandate.</p>
<h2>Uncharted waters</h2>
<p>None of this might be a problem if <a href="https://www.forbes.com/advisor/investing/inflation-outlook-2023/">central bank projections</a> of a sharp fall in inflation by the end of 2023 come to pass. But these projections are based on the belief that energy prices will continue to remain below their peak or even fall further in the coming year. </p>
<p>Just as in 2022, when central banks <a href="https://www.bloomberg.com/news/articles/2022-07-29/here-s-how-badly-central-banks-failed-to-spot-inflation-shock">failed to grasp the inflationary threat</a> early enough, other <a href="https://www.imf.org/en/Publications/WEO">risks beyond their control</a>, as well as political developments, may derail their hopes. These include an escalation of the war in Ukraine, which could raise energy prices further, more supply chain disruptions from China, and domestic pushes for higher wages.</p>
<p>With the cost-of-living crisis now at the <a href="https://www.weforum.org/agenda/2022/10/worries-inflation-economy-concerns/">top of the public’s agenda</a> in many developed countries, the setting of interest rates has ceased to be just a technical matter and has instead become highly political. Both governments and central banks are entering uncharted waters in their attempt to curb inflation without stifling growth. If their projections prove overly optimistic, the political as well as the economic costs could be high.</p>
<p>All this means that the outlook for inflation is highly uncertain. And fears of <a href="https://theconversation.com/1970s-style-stagflation-now-playing-on-central-bankers-minds-185868">1970s-style stagflation</a> – high inflation and stagnant economic growth – could become a reality.</p>
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<p><em>This article is part of <a href="https://theconversation.com/topics/global-economy-2023-132115">Global Economy 2023</a>, our series about the challenges facing the world in the year ahead. You might also like our Global Economy Newsletter, which you can <a href="https://theconversation.com/uk/newsletters/global-economy-and-business-115?utm_source=Global+Economy&utm_medium=linkback&utm_campaign=2023">subscribe to here</a>.</em></p><img src="https://counter.theconversation.com/content/197088/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steve Schifferes does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Central banks are raising interest rates to tame inflation, but 2023 will increasingly turn a technical decision into a political challenge.Steve Schifferes, Honorary Research Fellow, City Political Economy Research Centre, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1955002022-12-12T13:47:42Z2022-12-12T13:47:42ZFed wants inflation to get down to 2% – but why not target 3%? Or 0%?<figure><img src="https://images.theconversation.com/files/500187/original/file-20221211-61210-8w73ee.jpeg?ixlib=rb-1.1.0&rect=485%2C152%2C5505%2C3044&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Fed is taking aim at its inflation target. </span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/business-goals-concept-financial-goals-darts-royalty-free-image/1403382914?phrase=numbers%20target&adppopup=true">krisanapong detraphiphat/Moment</a></span></figcaption></figure><p>What’s <a href="https://www.wsj.com/articles/must-inflation-be-brought-down-all-the-way-to-2-11670162817?mod=e2tw">so special about the number 2</a>? Quite a lot, if you’re a central banker – and that number is followed by a percent sign.</p>
<p>That’s been the <a href="https://www.investors.com/news/federal-reserve-2-percent-inflation-target-may-be-history-or-else/">de facto or official target</a> inflation rate for the Federal Reserve, the European Central Bank and many other similar institutions since at least the 1990s. </p>
<p>But in recent months, <a href="https://www.forbes.com/advisor/investing/why-is-inflation-rising-right-now/">inflation in the U.S. and elsewhere has soared</a>, forcing the Fed and its counterparts to jack up interest rates to bring it down to near their target level. </p>
<p>As an <a href="https://scholar.google.com/citations?hl=en&user=GyTN5PYAAAAJ">economist who has studied the movements of key economic indicators like inflation</a>, I know that low and stable inflation is essential for a well-functioning economy. But why does the target have to be 2%? Why not 3%? Or even zero?</p>
<h2>Soaring inflation</h2>
<p>The U.S. inflation rate hit its 2022 peak in <a href="https://www.politico.com/news/2022/07/13/us-inflation-new-40-year-high-june-00045541">July at an annual rate of 9.1%</a>. The last time consumer prices were rising this fast was back in 1981 – over 40 years ago. </p>
<p>Since <a href="https://www.cnbc.com/2022/03/16/federal-reserve-meeting.html">March 2022</a>, the Fed has been actively trying to decrease inflation. In order to do this, the Fed <a href="https://www.federalreserve.gov/monetarypolicy/openmarket.htm">has been hiking its benchmark borrowing rate</a> – from effectively 0% back in March 2022 to the current range of 4.25% to 4.5%. </p>
<p><a href="https://theconversation.com/why-is-inflation-so-high-is-it-bad-an-economist-answers-3-questions-about-soaring-consumer-prices-173572">Most economists agree</a> that an <a href="https://www.bls.gov/cpi/">inflation rate approaching 8%</a> is too high, but what should it be? If rising prices are so terrible, why not shoot for zero inflation?</p>
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<img alt="Two white men and a white woman sit in chairs on a stage in front of an audience as another man stands nearby" src="https://images.theconversation.com/files/500188/original/file-20221211-62338-3510zz.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/500188/original/file-20221211-62338-3510zz.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/500188/original/file-20221211-62338-3510zz.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/500188/original/file-20221211-62338-3510zz.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/500188/original/file-20221211-62338-3510zz.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/500188/original/file-20221211-62338-3510zz.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/500188/original/file-20221211-62338-3510zz.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">The past three Fed chairs – seated from left, Jerome Powell, Janet Yellen and Ben Bernanke – agreed on the need to target 2% inflation.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/home/search?query=bernanke&mediaType=photo&st=keyword">AP Photo/Annie Rice</a></span>
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<h2>Maintaining stable prices</h2>
<p>One of the Fed’s core mandates, alongside low unemployment, <a href="https://www.chicagofed.org/research/dual-mandate/dual-mandate">is maintaining stable prices</a>.</p>
<p>Since 1996, Fed policymakers <a href="https://www.doi.org/10.1257/jep.11.2.97">have generally adopted the stance</a> that their target for doing so was an inflation rate of around 2%. In January 2012, then-Chairman Ben Bernanke <a href="https://www.reuters.com/article/us-usa-fed-inflation-target/in-historic-shift-fed-sets-inflation-target-idUSTRE80O25C20120126">made this target official</a>, and <a href="https://www.federalreserve.gov/newsevents/speech/yellen20170926a.htm">both of his successors</a>, including current Chair Jerome Powell, have made clear that the Fed sees 2% as the appropriate desired rate of inflation.</p>
<p>Until very recently, though, the problem wasn’t that inflation was too high – it was that it was too low. That prompted Powell in 2020, when inflation was barely more than 1%, to <a href="https://www.cnbc.com/2020/08/27/powell-announces-new-fed-approach-to-inflation-that-could-keep-rates-lower-for-longer.html">call this a cause for concern</a> and say the <a href="https://fredblog.stlouisfed.org/2020/11/from-inflation-targeting-to-average-inflation-targeting/">Fed would let it rise above 2%</a>. </p>
<p>Many of you may find it counterintuitive that the Fed would want to push up inflation. But inflation that is <a href="https://www.federalreserve.gov/faqs/economy_14400.htm">persistently too low</a> can pose serious risks to the economy. </p>
<p>These risks – namely sparking a <a href="https://www.investopedia.com/terms/d/deflationary-spiral.asp">deflationary spiral</a> – are why central banks like the Fed would never want to adopt a 0% inflation target. </p>
<h2>Perils of deflation</h2>
<p>When the economy shrinks during a recession with a fall in gross domestic product, aggregate demand for all the things it produces falls as well. As a result, prices no longer rise and may even start to fall – a <a href="https://www.forbes.com/advisor/investing/what-is-deflation/">condition called deflation</a>. </p>
<p>Deflation is the exact opposite of inflation – instead of prices rising over time, they are falling. At first, it would seem that falling and lower prices are a good thing – who wouldn’t want to buy the same thing at a lower price and see their purchasing power go up?</p>
<p>But deflation can actually be pretty <a href="https://www.forbes.com/advisor/investing/what-is-deflation/">devastating for the economy</a>. When people feel prices are headed down – not just temporarily, like big sales over the holidays, but for weeks, months or even years – they actually delay purchases in the hopes that they can buy things for less at a later date. </p>
<p>For example, if you are thinking of buying a new car that currently costs US$60,000, during periods of deflation you realize that if you wait another month, you can buy this car for $55,000. As a result, you don’t buy the car today. But after a month, when the car is now for sale for $55,000, the same logic applies. Why buy a car today, when you can wait another month and buy a car for $50,000 next month. </p>
<p>This lower spending leads to less income for producers, which can lead to unemployment. In addition, businesses, too, delay spending since they expect prices to fall further. This negative feedback loop – the deflationary spiral – generates higher unemployment, even lower prices and even less spending. </p>
<p>In short, deflation leads to more deflation. Throughout most of U.S. history, periods of deflation <a href="https://doi.org/10.1016/j.econlet.2006.03.029">usually go hand in hand with economic downturns</a>.</p>
<h2>Everything in moderation</h2>
<p>So it’s pretty clear some inflation is probably necessary to avoid a deflation trap, but how much? Could it be 1%, <a href="https://www.chicagobooth.edu/review/what-would-happen-if-fed-raised-its-inflation-target">3% or even 4%</a>?</p>
<p>Maybe. There isn’t any strong theoretical or empirical evidence for an inflation target of exactly 2%. The figure’s origin is a bit murky, but some reports suggest it simply came from a <a href="https://qz.com/2022696/where-did-the-feds-2-percent-inflation-target-come-from">casual remark</a> made by the New Zealand finance minister back in the late 1980s during a TV interview. </p>
<p>Moreover, there’s concern that creating economic targets for economic indicators like inflation corrupts the usefulness of the metric. Charles Goodhart, an economist who worked for the Bank of England, created an eponymous law that states: “When a measure becomes a target, it ceases to be a good measure.” </p>
<p>Since a core mission of the Fed is price stability, the target is beside the point. The main thing is that the Fed guide the economy toward an inflation rate high enough to allow it room to lower interest rates if it needs to stimulate the economy but low enough that it doesn’t seriously erode consumer purchasing power. </p>
<p>Like with so many things, moderation is key. </p>
<p><em>Article updated to reflect Fed rate hike.</em></p><img src="https://counter.theconversation.com/content/195500/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Veronika Dolar does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Fed is waging war to get inflation down to its preferred level of around 2%. An economist explains what’s so special about that number.Veronika Dolar, Assistant Professor of Economics, SUNY Old WestburyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1934162022-10-31T19:23:40Z2022-10-31T19:23:40ZWhy inflation will likely stay sky-high regardless of which party wins the midterms<figure><img src="https://images.theconversation.com/files/492405/original/file-20221030-24414-vdacq6.jpeg?ixlib=rb-1.1.0&rect=98%2C0%2C2802%2C1836&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The U.S. government can’t do much about rising food prices, which are primarily caused by supply chain problems.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/ConsumerSpending/6cb35bfb70fa43049ac1c8ce7c3728e6/photo?Query=inflation&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=8239&currentItemNo=0">AP Photo/Nam Y. Huh</a></span></figcaption></figure><p>Soaring inflation <a href="https://www.cnbc.com/2022/10/03/economy-inflation-top-of-mind-for-midterm-voters-giving-gop-slight-edge-in-new-monmouth-poll.html">is the top issue</a> for a lot of voters heading into the midterms, with most saying Republicans <a href="https://news.gallup.com/poll/1675/most-important-problem.aspx">would do a better job</a> of handling the problem. </p>
<p>Indeed, Republican candidates <a href="https://www.cnbc.com/2022/10/03/economy-inflation-top-of-mind-for-midterm-voters-giving-gop-slight-edge-in-new-monmouth-poll.html">are taking full advantage of voter concern about inflation</a> by hammering Democrats on the issue and pushing their own ideas to fight inflation, such as cutting both government spending and taxes. </p>
<p>As a <a href="https://scholar.google.com/citations?hl=en&user=eP0xZ1kAAAAJ">finance and economics expert</a>, I have studied inflation, what causes it and what can bring it down. That’s why I doubt a Republican Congress would have much, if any, effect on inflation. </p>
<h2>Two drivers of inflation</h2>
<p>Inflation, or a sustained rise in consumer prices, is created in two main ways.</p>
<p>The first is by way of an increase in demand for products and services. For example, at the beginning of the pandemic, <a href="https://hothardware.com/news/covid-19-webcam-shortage-prices-skyrocketing">demand for webcams soared</a>, as lots of employees were required to work remotely. As a result, the prices of webcams increased significantly.</p>
<p>Or take leisure travel, which has increased significantly as COVID-19 infections have come down. People are flying more, <a href="https://www.bankrate.com/personal-finance/travel-inflation-statistics">which has led to higher ticket prices</a>. </p>
<p>When these types of demand-driven price increases occur across a large number of products and services, the result is rising inflation.</p>
<p>Inflation can also result from higher production costs.</p>
<p>For instance, gas prices are on the rise because it has become a lot more expensive to produce it. The war in Ukraine <a href="https://fred.stlouisfed.org/series/DCOILWTICO">sent oil prices soaring</a> at the beginning of 2022. They’ve come down, but a recent supply cut by OPEC+ oil-producing nations <a href="https://www.nbcnews.com/business/consumer/higher-gas-prices-why-and-where-costco-gas-prices-rcna51458">caused another spike</a>. As oil prices increase, the higher costs are passed on to refiners, which leads to higher prices at the pump. </p>
<p>The increase in the price of eggs is another example of this type of inflation. <a href="https://www.marketwatch.com/story/why-egg-prices-are-sizzling-and-when-they-could-cool-off-11660320801">Bird flu caused the deaths</a> of about 10% of egg-laying hens <a href="https://www.cdc.gov/flu/avianflu/data-map-commercial.html">beginning in January 2022</a>. In addition, farmers <a href="https://www.tastingtable.com/1042132/the-unfortunate-truth-about-egg-prices">faced higher fuel and fertilizer costs</a>. These factors have caused the average price of eggs to <a href="https://fred.stlouisfed.org/series/APU0000708111">soar to an all-time high</a>.</p>
<h2>The Fed can fight only half the battle</h2>
<p>An economy’s central bank – not Congress or the president – is typically the first line of defense when it comes to battling inflation. Central banks set monetary policy, and their primary way of combating inflation is by raising interest rates. </p>
<p>In the U.S., the Federal Reserve focuses on the so-called <a href="https://www.forbes.com/advisor/investing/federal-funds-rate/">federal funds rate</a>, which is the base rate that banks use in setting their own deposit and loan rates. The Fed <a href="https://www.federalreserve.gov/monetarypolicy/openmarket.htm">has raised this benchmark five times in 2022</a>, from <a href="https://fred.stlouisfed.org/series/DFF">about 0% in March to 3%</a> – and <a href="https://www.bankrate.com/banking/federal-reserve/fomc-what-to-expect/">is expected to lift rates</a> another 0.75 percentage point on Nov. 2, 2022.</p>
<p>The main goal of the rate hikes is to increase borrowing costs and thus drive down demand – the first driver of inflation that I noted above. The idea is that higher interest rates lead people and businesses to borrow less. The less people and businesses borrow, the less they will spend.</p>
<p>The impact of higher interest rates is already being felt in the housing market, for example. Current 30-year mortgage rates are over 7% on average, <a href="https://fred.stlouisfed.org/series/MORTGAGE30US">more than double the rates of a year ago</a> and the highest since 2002. This is resulting in <a href="https://www.nar.realtor/blogs/economists-outlook/existing-home-sales-fall-for-the-seventh-straight-month-and-decline-0-4-in-august-2022">fewer home sales</a> and <a href="https://www.texastribune.org/2022/09/01/texas-housing-market-cooling/">falling prices</a>. </p>
<p>The problem is that this approach has absolutely no effect on the other main generator of inflation, rising production costs. </p>
<p>The Fed’s higher rates will not stop the war in Ukraine or prompt hens to lay more eggs. Therefore, energy and egg prices won’t drop as a result. This is also true for all products and services whose production costs are increasing because of supply chain issues. </p>
<p>These issues have affected the prices of everything from <a href="https://www.lairedigital.com/blog/the-effects-of-the-supply-chain-crisis-on-manufacturing-and-construction">bicycles to bathroom tissue</a>. Higher interest rates will not affect the demand for and thus the prices for bikes, toilet paper or any other goods feeling supply chain strains.</p>
<figure class="align-center ">
<img alt="For sale sign sits atop a white post in front of a cream/brown multi-floor house" src="https://images.theconversation.com/files/492623/original/file-20221031-7897-klp6rc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/492623/original/file-20221031-7897-klp6rc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/492623/original/file-20221031-7897-klp6rc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/492623/original/file-20221031-7897-klp6rc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/492623/original/file-20221031-7897-klp6rc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/492623/original/file-20221031-7897-klp6rc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/492623/original/file-20221031-7897-klp6rc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The Fed’s interest rate hikes are starting to sap demand for new homes – the one way policymakers can fight inflation.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/California-Jobs/a4b41f5edbd7435980dffea5fbc19632/photo?Query=inflation%20home%20sale&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=10&currentItemNo=2">AP Photo/Rich Pedroncelli</a></span>
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<h2>Congress’ fiscal tools are also limited</h2>
<p>Congress and the White House do have some tools they can use in the inflation fight. One problem is they’re <a href="https://www.nytimes.com/2011/07/03/business/economy/03view.html">not very popular</a> and so hard to pass. Another is that, like the Fed’s rate hikes, they address only one kind of inflation.</p>
<p>The main thing the government can do is take money out of the pockets of consumers and businesses, either by raising taxes or cutting spending – or both.
A reduction in money in the economy <a href="https://www.itsuptous.org/US-fiscal-policy?gclid=Cj0KCQjwteOaBhDuARIsADBqReiA_wGVv35FLtu0PaIVV4vAxzQpEmXG0KppBeXtp-SUg8tqKuK6a0caAuRtEALw_wcB">leads to lower demand</a> for goods and services, both as the government spends less and individuals and businesses give more or get less from the government. </p>
<p>But as with higher rates, it won’t do anything to fix the global economy’s ongoing supply chain problems or lower production costs. Changes in taxes or government spending will not reduce food prices or the cost of heating your home this winter.</p>
<p>So even while a Republican Congress might want to do more about inflation, whatever it does will affect only one of the drivers.</p>
<figure class="align-center ">
<img alt="an elderly white man with gray hair and a suit stands behind a lectern" src="https://images.theconversation.com/files/492406/original/file-20221030-68119-aorh0d.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/492406/original/file-20221030-68119-aorh0d.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/492406/original/file-20221030-68119-aorh0d.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/492406/original/file-20221030-68119-aorh0d.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/492406/original/file-20221030-68119-aorh0d.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/492406/original/file-20221030-68119-aorh0d.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/492406/original/file-20221030-68119-aorh0d.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Republicans hope they can pin the blame for inflation on President Biden, though the data shows that which party is in the White House doesn’t make that much of a difference to the rate of inflation.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/Biden-JunkFees/3b56f3bed2614aac9212c3ef7d923bb7/photo?Query=inflation&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=8239&currentItemNo=25">AP Photo/Patrick Semansky</a></span>
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<h2>Who’s better on inflation</h2>
<p>Taking a step back, does either political party have a better track record on inflation? </p>
<p>The short answer is no, <a href="https://theconversation.com/biden-is-inheriting-a-wrecked-economy-but-democrats-have-a-record-of-avoiding-recession-and-reducing-unemployment-153106">based on my analysis</a> of economic data from 1953 to 2020. From Presidents Dwight D. Eisenhower through Donald Trump, <a href="http://dx.doi.org/10.2139/ssrn.3542494">inflation has averaged 3.35%</a> under Democratic administrations and 3.5% under Republicans. </p>
<p>One caveat, however. When the House and Senate are controlled by Republicans while the president is a Democrat, inflation averaged 2 percentage points less than than when everything was in Democratic hands. There are fewer data points, so it’s not as strong a finding, but it suggests divided government has an upside. </p>
<p>Another way to look at this is to examine the parties’ current or proposed policies. Democrats have touted their “Inflation Reduction Act,” a package of climate, health care and tax measures passed in August, as proof that they are tackling the problem. But despite the name, <a href="https://www.npr.org/2022/08/11/1116229743/inflation-reduction-act-questions-answered">economists expect it to have very little impact</a> on inflation anytime soon, because most of the measures will take years to go into effect. </p>
<p>Republicans, meanwhile, <a href="https://www.nytimes.com/2022/10/26/us/politics/midterms-gop-republican-inflation-plans.html">have proposed cutting spending</a> – such as on America’s social safety net – and lowering taxes for wealthier individuals and businesses. While spending cuts could reduce demand – and inflation – the lower taxes would work at cross purposes and drive up prices by pumping more money into the economy. </p>
<p>In other words, expect inflation to stay high regardless of which political party is in the majority of the House and Senate. And then, turn to hope – that the Fed’s rate hikes work, and the supply chain problems driving up costs begin to ease.</p><img src="https://counter.theconversation.com/content/193416/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>William Chittenden does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Many voters say inflation is the issue that matters to them most as they head to the polls. The problem is, the people they choose can’t do much about it.William Chittenden, Associate Professor of Finance, Texas State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1877362022-08-02T12:57:52Z2022-08-02T12:57:52ZWhy food insecurity among Gen Z is so much higher than for other age groups<figure><img src="https://images.theconversation.com/files/476195/original/file-20220727-14-nkxvg5.jpg?ixlib=rb-1.1.0&rect=121%2C56%2C4995%2C2926&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">About 30% of Gen Z adults needed help from a food bank or other charity to get enough food in 2022. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/FoodBanksUtah/71a3a68e5d4f4c85869e41ca301802ed/photo?Query=food%20bank&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=2982&currentItemNo=35">AP Photo/Rick Bowmer</a></span></figcaption></figure><figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/476532/original/file-20220728-20112-skb7td.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/476532/original/file-20220728-20112-skb7td.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=255&fit=crop&dpr=1 600w, https://images.theconversation.com/files/476532/original/file-20220728-20112-skb7td.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=255&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/476532/original/file-20220728-20112-skb7td.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=255&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/476532/original/file-20220728-20112-skb7td.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=321&fit=crop&dpr=1 754w, https://images.theconversation.com/files/476532/original/file-20220728-20112-skb7td.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=321&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/476532/original/file-20220728-20112-skb7td.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=321&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="attribution"><a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
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<p>Adult members of Generation Z are experiencing food insecurity at <a href="https://ag.purdue.edu/cfdas/wp-content/uploads/2022/07/Report_06-2022.pdf">over twice the rate of the average American</a>, according to our latest consumer food survey. In fact, about 1 in 3 Americans born from 1996-2004 have had trouble affording enough food in 2022.</p>
<p>That compares with fewer than 1 in 5 millennials and members of Generation X, and fewer than 1 in 10 baby boomers. </p>
<p>We run the <a href="https://ag.purdue.edu/cfdas/about/our-team/">Center for Food Demand Analysis and Sustainability</a> at Purdue University, and every month, through our Consumer Food Insights survey, we query over 1,200 Americans with the goal of tracking national food security as well as many other behaviors, attitudes and preferences related to food. </p>
<p>Food insecurity means <a href="https://www.ers.usda.gov/topics/food-nutrition-assistance/food-security-in-the-u-s/definitions-of-food-security/">having a lack of money or other resources for food</a>. And when food insecurity surges, it can take a long time for affected populations to recover. After the Great Recession that ran from 2007 to 2009, <a href="https://www.usda.gov/media/blog/2019/10/03/food-insecurity-us-households-2018-down-2017-continuing-trend-and-returning">food insecurity increased by 34%</a>. It took a decade for food insecurity to drop to its pre-recession levels.</p>
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<p>With COVID-19, food insecurity increased again, particularly among the most vulnerable groups in society, <a href="https://www.doi.org/10.1002/aepp.13099">such as seniors</a> and <a href="https://www.doi.org/10.1002/aepp.13069">households with children</a>. </p>
<p>But it also increased for members of Gen Z, who were the <a href="https://www.bls.gov/news.release/archives/empsit_01082021.htm#:%7E:text=HOUSEHOLD%20DATA%0ATable%20A%2D10.%20Selected%20unemployment%20indicators%2C%20seasonally%20adjusted">most likely to face unemployment</a> due to the pandemic. And for those attending college, the pandemic reduced essential food services on campus and <a href="https://hechingerreport.org/more-students-are-dropping-out-of-college-during-covid-and-it-could-get-worse/">increased the number of students dropping out of school</a>.</p>
<p>Now, with <a href="https://fred.stlouisfed.org/series/CPIAUCSL">inflation soaring at the fastest pace in 40 years</a>, those who lost jobs during the pandemic and college students with fixed incomes must stretch their limited resources even further at the grocery store.</p>
<p>We have found that education, income and race are three of the biggest factors driving food insecurity among America’s youngest generation. Members of Gen Z without a college degree or who make less than the <a href="https://aspe.hhs.gov/topics/poverty-economic-mobility/poverty-guidelines/prior-hhs-poverty-guidelines-federal-register-references/2021-poverty-guidelines">federal poverty line</a> have a much higher risk of being food insecure – over three times the risk of other Gen Z households. The rate of food insecurity among Gen Z Black and Hispanic households is almost double that of white and Asian households. </p>
<p>Other research shows that factors like marriage and owning your own home <a href="https://doi.org/10.1093/aepp/ppt024">typically improve food security</a>. Since young people typically aren’t married or own a home, Gen Z by and large isn’t benefiting from these factors.</p>
<p>Additionally, full-time college students are generally <a href="https://www.fns.usda.gov/snap/students">not eligible for the Supplemental Nutrition Assistance Program</a>, formerly known as food stamps. Although student eligibility has been expanded during the ongoing COVID-19 public health emergency, the paperwork required to apply <a href="https://doi.org/10.1111/puar.13497">can potentially discourage young people</a> who have much less experience navigating the government bureaucracy. </p>
<p>Our survey also shows a significant portion of Gen Z – 30% – has relied on free groceries from a pantry, church or other charity.</p>
<p>Prices for food consumed at home are currently jumping at over 12% a year. That’s the <a href="https://fred.stlouisfed.org/series/CUSR0000SAF11#">fastest pace since 1979</a>. Our survey data only reflects some of these recent price gains, so it’s unclear yet how much this will affect food insecurity. But what is clear is that Gen Z Americans, like other vulnerable groups, need more support to ensure they can access an affordable diet.</p><img src="https://counter.theconversation.com/content/187736/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>About a third of American adults in Generation Z lack the money or resources needed for reliable access to nutritious food.Sam Polzin, Food and Agriculture Survey Scientist, Purdue UniversityAhmad Zia Wahdat, Postdoctoral Research Associate, Agricultural Economics, Purdue UniversityJayson Lusk, Professor of Agricultural Economics, Purdue UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1866812022-07-08T18:42:09Z2022-07-08T18:42:09ZJune jobs report suggests Fed could avoid a recession – but room for error is minuscule<figure><img src="https://images.theconversation.com/files/473225/original/file-20220708-17-txirzp.jpg?ixlib=rb-1.1.0&rect=116%2C124%2C4841%2C3574&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Fed Chair Jerome Powell is hoping to orchestrate a very delicate dance. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/FederalReservePowell/d31abb0e247d410894f1f2674e917407/photo?Query=Jerome%20powell&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=1666&currentItemNo=23">AP Photo/Manuel Balce Ceneta</a></span></figcaption></figure><p><em>The U.S. economy <a href="https://www.bloomberg.com/news/articles/2022-07-08/us-job-gains-top-estimates-unemployment-rate-holds-at-3-6?srnd=premium#xj4y7vzkg&sref=Hjm5biAW">added more jobs than expected</a> in June, signaling the labor market remains strong even as the Federal Reserve tries to weaken it to tame inflation. The <a href="https://www.bls.gov/news.release/empsit.nr0.htm">July 8, 2022, jobs report</a> also showed the unemployment rate <a href="https://fred.stlouisfed.org/series/UNRATE">remained at a 70-year low</a> of 3.6%.</em></p>
<p><em>Does this mean the U.S. will avoid a <a href="https://theconversation.com/fed-hopes-for-soft-landing-for-the-us-economy-but-history-suggests-it-wont-be-able-to-prevent-a-recession-182270">Fed-induced recession</a>?</em></p>
<p><em>We asked <a href="https://scholar.google.com/citations?user=rRWXpyYAAAAJ&hl=en&oi=ao">Christopher Decker</a>, an economist at the University of Nebraska Omaha, to explain the numbers and what they mean for the Fed and the economy.</em></p>
<h2>What did we learn in the June jobs report?</h2>
<p>The report showed that the economy added 372,000 jobs in June. While this figure is down from a revised increase of 384,000 in May and is much lower than other recent gains, it’s <a href="https://fred.stlouisfed.org/graph/?g=8eiB">still very good by historical standards</a>. </p>
<p>Gains were across the board with all key sectors adding to the total increase in nonfarm payrolls. </p>
<p>Generally speaking, people continue to be pulled back into the labor force, largely by higher wages as well as the rising cost of living, which makes it harder for families to go without a steady income stream. For example, the number of people employed part time for economic reasons declined by 707,000 in June. This seems to suggest that there is increased desire for, and an ability to secure, a higher-paying, more stable full-time job. </p>
<p>The <a href="https://fred.stlouisfed.org/series/LNS11300002">female labor force participation rate declined slightly</a> to 56.8% – which is over a percentage point below what it was before the COVID-19 pandemic. This figure is worth watching closely and may be because women are hesitant to reenter the workforce or are <a href="https://www.nytimes.com/2022/07/07/business/economy/women-labor-caregiving.html">struggling to find child care</a>. </p>
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<h2>So does this mean there won’t be a recession?</h2>
<p>That’s the big question. </p>
<p>June gains were strong, but the job market is clearly cooling off. And there’s evidence the <a href="https://money.com/slowing-economy-signals/">broader economy is weakening</a> – two signs the Fed’s <a href="https://nrf.com/research/monthly-economic-review-july-2022">recent aggressive efforts</a> to reduce inflation by choking off growth are working. </p>
<p>The housing market is a case in point. Average 30-year mortgage rates <a href="https://fred.stlouisfed.org/series/MORTGAGE30US">shot up to a 13-year high</a> of 5.8% in June after the Fed lifted rates by 0.75 percentage point, which has had a <a href="https://www.cnn.com/2022/06/20/homes/slowing-housing-market/index.html">chilling effect on home purchases</a>. </p>
<p>And now we’re seeing the effect in residential construction jobs, which <a href="https://fred.stlouisfed.org/series/CES2023610001">declined for the first time in a year</a> as higher borrowing costs dampened demand. This is a sector I like to look at closely to help determine if what the Fed is doing is taking root in the economy. </p>
<p>In addition, in May, retail sales <a href="https://www.cnbc.com/2022/06/15/retail-sales-may-2022-unexpected-0point3percent-decline-hammered-by-inflation.html">unexpectedly declined </a> and a forward-looking economic index <a href="https://www.conference-board.org/topics/us-leading-indicators">fell for a second straight month</a> – both signals of a slowing economy. </p>
<h2>Can a recession be avoided?</h2>
<p>It may seem strange that the U.S. central bank is trying to actually hurt economic growth, but that just shows how important policymakers think it is to fight soaring inflation, which is <a href="https://www.cnn.com/2022/06/10/economy/may-inflation-gas-prices/index.html">currently the highest in over 40 years</a>.</p>
<p>The problem of rising prices is of major concern to the Fed, as it is a <a href="https://www.stlouisfed.org/in-plain-english/the-fed-and-the-dual-mandate">key component of its “dual mandate”</a> to control inflation and maintain healthy job growth.</p>
<p>Runaway inflation <a href="https://www.investopedia.com/articles/insights/122016/9-common-effects-inflation.asp">is cancerous to any economy</a>. When price growth outpaces that of income, consumers have to curb spending. Production declines and people lose their jobs. The Fed’s only means of reducing inflation is to curb demand by reducing the supply of money and increasing interest rates. This, however, also curbs economic growth. So the Fed is trying to manage a “soft landing” – which means reducing inflation without hurting growth so much that it causes a recession.</p>
<p>There are some early signs the Fed is succeeding. The economy is slowing, though June jobs show underlying strength in the labor market. At the same time, inflation appears to be easing as well, in part thanks to <a href="https://www.forbes.com/sites/sergeiklebnikov/2022/07/05/oil-falls-below-100-per-barrel-for-first-time-since-may-as-strong-likelihood-of-recession-hurts-demand/?sh=630306dce2f4">falling global demand for oil</a>. U.S. gasoline prices – the most visible price consumers see every single day – has come down in recent weeks after <a href="https://fred.stlouisfed.org/series/GASREGW">peaking at a record US$5</a> in June. </p>
<p>But executing a soft landing is a delicate dance for the Fed. The central bank can reduce demand for things via interest rates, but it can’t do much about supply. The primary reason energy and food costs <a href="https://www.bls.gov/news.release/cpi.nr0.htm">have been skyrocketing in recent months</a> is not high demand but the <a href="https://www.federalreserve.gov/econres/notes/feds-notes/the-effect-of-the-war-in-ukraine-on-global-activity-and-inflation-20220527.htm">war in Ukraine</a>. </p>
<p><a href="https://www.npr.org/2022/03/12/1086309021/u-s-gas-prices-hit-record-highs-following-sanctions-on-russia">Sanctions on Russia</a>, the world’s <a href="https://www.iea.org/reports/russian-supplies-to-global-energy-markets/oil-market-and-russian-supply-2">second-largest crude oil exporter</a>, and <a href="https://newsrnd.com/business/2022-07-06-oil--russia-halts-transit-from-kazakhstan-to-europe.H1Dko9fiq.html">reduced shipments from Russia</a> to parts of Europe have disrupted energy markets and driven up global oil prices. </p>
<p>And Ukraine, a <a href="https://www.bbc.com/news/world-europe-61583492">key producer of food and other agricultural goods</a>, is struggling to export corn, wheat and other products because Russia <a href="https://www.washingtonpost.com/world/2022/07/07/ukraine-grain-farmers-black-sea-blockade/">is blockading key ports</a>. </p>
<p>Continuing shortages of energy and food mean inflation could stay elevated no matter what the Fed does. And that could result in the Fed’s having to lift interest rates a lot and cut growth to the bone to have a meaningful effect on rising prices. </p>
<p>This makes the Fed’s current dance the most delicate it has attempted <a href="https://www.federalreservehistory.org/essays/great-inflation">since the 1980s</a>, and it must be executed flawlessly for it to succeed. The June jobs report is good news, but the economy isn’t out of the woods yet. Data in August and September will be crucial to knowing in which direction the economy is heading – toward recession or not.</p><img src="https://counter.theconversation.com/content/186681/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Christopher Decker does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The US economy gained more jobs than expected in June, although it was still a decline from May. An economist explains what the new numbers mean.Christopher Decker, Professor of Economics, University of Nebraska OmahaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1811202022-04-12T17:28:38Z2022-04-12T17:28:38ZRussian ruble’s recovery masks disruptive impact of West’s sanctions – but it won’t make Putin seek peace<figure><img src="https://images.theconversation.com/files/457535/original/file-20220411-18-1k1fz9.jpg?ixlib=rb-1.1.0&rect=215%2C197%2C5775%2C3790&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">People bought the last remaining groceries at a Finnish PRISMA store that was closing down in in St. Petersburg in March.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/APTOPIXRussiaEconomy/f1c28b8b1c0f48649df0515ce44e3099/photo?Query=russia%20company&mediaType=photo&sortBy=creationdatetime:desc&dateRange=Anytime&totalCount=2180&currentItemNo=77">AP Photo</a></span></figcaption></figure><p>Six weeks into the war with Ukraine, Russia’s economy <a href="https://fortune.com/2022/03/31/ukraine-war-russia-ruble-almost-recovered-does-that-mean-sanctions-not-working/">seems to be holding up</a> better than initially expected.</p>
<p>Despite <a href="https://theconversation.com/economic-sanctions-may-make-russians-lives-worse-without-stopping-putins-assault-on-ukraine-179623">unprecedented sanctions</a> and an <a href="https://theconversation.com/why-apple-disney-ikea-and-hundreds-of-other-western-companies-are-abandoning-russia-with-barely-a-shrug-178516">exodus of Western companies</a>, the Russian ruble – a widely followed indicator of the economy – <a href="https://www.themoscowtimes.com/2022/04/08/russias-ruble-stages-rebound-despite-western-sanctions-a77289">has recovered all of its earlier losses</a>. Meanwhile, <a href="https://www.reuters.com/business/energy/russia-maintains-gas-deliveries-europe-moots-fresh-sanctions-2022-04-04">billions of dollars</a> continue to flow in from energy sales to Europe and elsewhere, which has allowed the Kremlin to keep paying its international debts.</p>
<p>However, Russia’s apparently robust financial situation is something of a chimera and masks <a href="https://theconversation.com/economic-sanctions-may-make-russians-lives-worse-without-stopping-putins-assault-on-ukraine-179623">the real pain being experienced</a> by Russians and stress on the economy.</p>
<p>I’ve been a close observer of Russia for <a href="https://www.wesleyan.edu/academics/faculty/prutland/profile.html">over 30 years</a>. I have been struck by the tension between Russia’s <a href="https://www.ponarseurasia.org/the-2020-oil-crash-is-russia-still-an-energy-superpower/">integration into the global economy</a> on the one hand and its growing domestic <a href="https://www.amazon.com/Authoritarian-Russia-Analyzing-Post-Soviet-European/dp/082296368X">authoritarianism</a> on the other.</p>
<p>Russia’s integration is what makes the sanctions sting. Its authoritarianism is what makes them irrelevant.</p>
<h2>Swift sanctions</h2>
<p>Broad and deep <a href="https://www.piie.com/blogs/realtime-economic-issues-watch/russias-war-ukraine-sanctions-timeline">sanctions</a> were promptly imposed on Russia by over 50 countries after the Feb. 24, 2022, invasion. </p>
<p>Notably, those joining the sanctions included historically neutral Switzerland – a key location for <a href="https://www.bloomberg.com/news/articles/2022-04-07/swiss-have-frozen-8-billion-in-russian-assets-to-date?sref=Hjm5biAW">many of Russia’s overseas banking assets</a> – and Taiwan, the <a href="https://www.kommersant.ru/doc/5294238">source of 60%</a> of the world’s microchips.</p>
<p>The sanctions had an immediate and dramatic impact. The <a href="https://theconversation.com/ordinary-russians-are-already-feeling-the-economic-pain-of-sanctions-over-ukraine-invasion-178126">ruble lost 50%</a> of its value within days as Russians lined up to draw out dollars and rubles from their bank accounts. Panic buying of sugar, buckwheat and other essentials meant empty shelves and scuffles in stores. The official sanctions were followed by a wave of <a href="https://som.yale.edu/story/2022/over-600-companies-have-withdrawn-russia-some-remain">foreign companies</a> deciding to suspend their operations in Russia or pull out entirely.</p>
<h2>The ruble recovers</h2>
<p>But the more dire predictions of how this would affect Russia have not come to pass. </p>
<p>For example, after plunging to a record low of 136 to the U.S. dollar on March 10, 2022, the ruble has recovered to 83 to the dollar as of April 11, roughly <a href="https://www.xe.com/currencycharts/?from=USD&to=RUB&view=1Y">what it was worth</a> before the invasion. This is due to the Russian Central Bank’s imposition of <a href="https://www.wsj.com/articles/russia-central-banker-nabiullina-putin-ukraine-11649430535?page=1">strict rules</a>, such as requiring exporters to convert 80% of their dollar earnings into rubles, banning individuals from taking more than US$10,000 out of the country and introducing a 12% tax on dollar purchases.</p>
<p>Likewise, Russia met its debt payments in March, and though the ratings agency S&P declared it to be in “<a href="https://www.ft.com/content/b46d0acb-4d4c-4cd2-80a3-3003ca3a0021">selective default</a>” in April after <a href="https://www.nytimes.com/2022/04/10/business/russia-debt-default-rubles.html">it paid bondholders in rubles</a> rather than dollars, it still hasn’t fully defaulted on its debt. </p>
<p>While some individual countries such as the U.S., U.K. and Lithuania have announced that they will no longer buy Russian oil and gas, the European Union cannot afford to take such a step <a href="https://econtribute.de/RePEc/ajk/ajkpbs/ECONtribute_PB_028_2022.pdf">until the infrastructure</a> for handling alternative fuel supplies has been created. And China and India <a href="https://theprint.in/world/china-is-quietly-picking-up-cheap-russian-crude-as-india-buys-more/887648/">continue to be big buyers</a> of Russian oil. </p>
<p>Furthermore, any drop in the volume of sales due to sanctions has been more than compensated by a <a href="https://www.ft.com/content/56df1dc0-6cf3-41f8-a644-d44be5085ee8#post-77221d1c-1b95-4955-a875-a0ab8bd35830">60% spike in the price of oil</a>. </p>
<p>As a result, Russia continues to rake in <a href="http://www.business-gazeta.ru/article/546308">$35 billion a month</a> from its oil and gas exports, <a href="https://ridl.io/en/russia-s-default-believe-it-or-not/">more than enough</a> to enable it to meet its international debt obligations – and to keep the war going. </p>
<h2>Soaring inflation</h2>
<p>The ruble, however, is no longer a convertible currency, so its exchange rate is an artificial indicator that <a href="https://www.nber.org/papers/w29929?utm_campaign=ntwh&utm_medium=email&utm_source=ntwg4">tells us little</a> about the economy. Its apparent stabilization is a deceptive measure and doesn’t reflect the traumatic shock that the real economy is experiencing as a result of the sanctions. </p>
<p>The rising cost of living, on the other hand, is a more revealing indicator. It’s something the Kremlin is likely concerned about <a href="https://www.doi.org/10.1080/10758216.2017.1383854">because it can potentially lead to social unrest</a>.</p>
<p><a href="https://www.themoscowtimes.com/2022/04/08/russias-ruble-stages-rebound-despite-western-sanctions-a77289">Russian consumer prices rose 7.6%</a> in March and were up 16.7% from a year earlier. Part of this is due to rising global food prices even before the Ukraine war. The <a href="https://www.ft.com/content/5212871a-d2d3-41ef-99fe-400ed33859e8">United Nations food price index was up</a> 34% in March from a year earlier. </p>
<p>Russian Prime Minister Mikhail Mishustin offered a window into how bad things actually are when he <a href="https://www.kommersant.ru/doc/5295575">told the State Duma</a> on April 7, 2022, that the crisis is the worst that Russia has faced in 30 years. The economy will take six months to adapt, he added – which may turn out to be an overly optimistic assessment. The European Bank for Reconstruction and Development expects the Russian economy to <a href="https://www.wsj.com/articles/russia-set-for-steep-slump-and-long-stagnation-in-wake-of-ukraine-war-11648702801?mod=mktw&mod=article_inline">contract by 10%</a> this year. </p>
<h2>Softening the blow on workers</h2>
<p>The potential for rising unemployment is another concern.</p>
<p>Analysts surveyed by Bloomberg <a href="https://www.bloomberg.com/news/articles/2022-04-07/russians-paid-not-to-work-won-t-keep-jobless-spike-away-for-long?sref=Hjm5biAW">forecast Russian joblessness</a> to exceed 9% in the coming months, the first time it’s been that high in more than a decade. </p>
<p>To soften the blow, the government <a href="https://ria.ru/20220319/rynok-1778990614.html?in=t">is spending 40 billion rubles</a> (about $470 million) subsidizing wages in industries affected by the sanctions. This affects about 400,000 workers in total.</p>
<p>Meanwhile, the fate of the <a href="https://www.bloomberg.com/news/articles/2022-03-12/companies-leaving-russia-don-t-know-if-and-when-they-ll-return?sref=Hjm5biAW">thousands of workers</a> in foreign-owned businesses that are now shuttered remains uncertain. Russia has yet to follow through on <a href="https://www.reuters.com/business/russia-approves-first-step-towards-nationalising-assets-firms-that-leave-ruling-2022-03-09/">threats to nationalize their assets</a>, but some companies, such as the local franchisees of retail outlets like McDonald’s, may try to reopen under Russian management and build new brands and supply chains. The Russian subsidiaries of the top Western accounting firms <a href="https://www.ft.com/content/be3d59a3-d9b2-4303-946d-d61d32c2ff08">reportedly plan to continue operating</a> under new names.</p>
<p>One important safety valve for Russian workers is the presence of <a href="https://www.reuters.com/article/us-health-coronavirus-russia-migrants/russias-stranded-migrants-lose-jobs-rely-on-handouts-and-peers-for-food-idUSKCN22911T">roughly 10 million migrant workers</a>, 15% of the total workforce, who are typically the first to be fired. The <a href="https://www.rferl.org/a/russia-sanctions-central-asian-migrants/31771858.html">fall in the remittances</a> they send back home will be a blow to the economies of Central Asia.</p>
<figure class="align-center ">
<img alt="A white balding man gestures with his left hand over desk as he looks at a monitor that shows one white man in a big window and others around him" src="https://images.theconversation.com/files/457745/original/file-20220412-14283-cyx5dh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/457745/original/file-20220412-14283-cyx5dh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=367&fit=crop&dpr=1 600w, https://images.theconversation.com/files/457745/original/file-20220412-14283-cyx5dh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=367&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/457745/original/file-20220412-14283-cyx5dh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=367&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/457745/original/file-20220412-14283-cyx5dh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=461&fit=crop&dpr=1 754w, https://images.theconversation.com/files/457745/original/file-20220412-14283-cyx5dh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=461&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/457745/original/file-20220412-14283-cyx5dh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=461&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Russian President Vladimir Putin gestures while speaking during a meeting on economic issues via videoconference with Prime Minister Mikhail Mishustin and others.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/RussiaPutin/6fa8240db636402d9b5bb1c3aa4130eb/photo?Query=Mishustin&mediaType=photo&sortBy=creationdatetime:desc&dateRange=Anytime&totalCount=283&currentItemNo=11">Alexei Nikolsky, Sputnik, Kremlin Pool Photo via AP</a></span>
</figcaption>
</figure>
<h2>Tech troubles</h2>
<p>Russian consumers and companies are also encountering shortages of a wide range of goods, including <a href="https://www.kommersant.ru/doc/5304630">pharmaceutical supplies</a>, such as asthma inhalers, and drugs for Parkinson’s disease. Even copy paper, whose <a href="https://ria.ru/20220323/bumaga-1779570437.html?in=t">price has tripled</a> over the past month, is hard to come by because of a halt to the import of key chemicals, <a href="https://ria.ru/20220408/ege-1782473490.html">leading to calls</a> for university entrance exams to be suspended this year.</p>
<p>[<em>Like what you’ve read? Want more?</em> <a href="https://memberservices.theconversation.com/newsletters/?source=inline-likethis">Sign up for The Conversation’s daily newsletter</a>.]</p>
<p>The situation looks particularly grave in the information technology sector. Russian companies and state-owned enterprises remain heavily dependent on imported hardware and software – <a href="https://www.kommersant.ru/doc/5294238">despite a 2017 order</a> to wean themselves off of Western software. As part of the sanctions, companies like Microsoft and Google are <a href="https://www.washingtonpost.com/business/2022/03/04/russia-west-business-breakdown/">no longer doing business</a> in Russia, leaving local managers scrambling to find alternative software.</p>
<p>Compounding the problem is the fact that tens of thousands of IT professionals <a href="https://www.themoscowtimes.com/2022/04/01/russia-plays-tug-of-war-as-its-talented-it-workers-head-for-the-door-a77160">are leaving Russia</a> because they can easily work overseas, free from the economic and political restrictions of life in Russia. In a bid to stem the flow, on March 29, 2022, Prime Minister Mishustin <a href="https://www.themoscowtimes.com/2022/04/01/russia-plays-tug-of-war-as-its-talented-it-workers-head-for-the-door-a77160">signed a decree</a> exempting IT professionals from the draft.</p>
<h2>A bleak future</h2>
<p>The goal of the Western powers in imposing sanctions was to increase pressure on the government in the hope that President Vladimir Putin would come to the realization that the costs of continuing the war in Ukraine exceed the benefits. Unfortunately, that strategy may exaggerate the extent to which Putin factors the living standards of ordinary Russians into his decision-making calculus. </p>
<p>Moreover, the war and the resulting sanctions seem likely to be further empowering hard-line nationalist elements of the Russian government, with some critics calling for a reintroduction of Soviet-style central planning and a <a href="https://topwar.ru/194650-gospodin-prezident-ne-pora-nachinat-chistit-rossiju.html">military mobilization</a> of the economy. </p>
<p>Put simply, the future looks bleak for Russian citizens, who will continue to bear the brunt of the sanctions. Putin apparently expects them to tighten their belts until he achieves his “victory” – which is increasingly being <a href="https://globalaffairs.ru/articles/kto-my-gde-my/">seen in Russia</a> as a war with the “collective West,” not just Ukraine.</p><img src="https://counter.theconversation.com/content/181120/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Rutland does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Despite the ruble’s recovery, sanctions have actually dealt a punishing blow to the Russian economy. But changing Putin’s mind is another matter.Peter Rutland, Professor of Government, Wesleyan UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1735722021-12-10T16:11:35Z2021-12-10T16:11:35ZWhy is inflation so high? Is it bad? An economist answers 3 questions about soaring consumer prices<figure><img src="https://images.theconversation.com/files/436961/original/file-20211210-92077-ku5hu9.jpg?ixlib=rb-1.1.0&rect=140%2C90%2C5377%2C3333&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Used car and truck prices are up 31% over the previous year.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/BizUsedCarSales/8800bac7d31449b3b8e8dea920ac7fb7/photo?Query=used%20car%20lot&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=230&currentItemNo=15">AP Photo/David Zalubowski</a></span></figcaption></figure><p><em>Consumer prices <a href="https://www.bls.gov/news.release/cpi.nr0.htm">jumped 6.8% in November 2021 from a year earlier</a> – the fastest rate of increase since 1982, according to Bureau of Labor Statistics data published on Dec. 10, 2021. The biggest jumps during the month were in energy, used cars and clothing. The Conversation U.S. asked University of South Carolina economist <a href="https://scholar.google.com/citations?user=B744wv0AAAAJ&hl=en&oi=ao">William Hauk</a> to explain what’s driving the recent increase in inflation and how it affects consumers, companies and the economy.</em></p>
<h2>1. Why is inflation running so high?</h2>
<p>There are two basic reasons why inflation has been increasing: supply and demand. </p>
<p>Starting with the latter, <a href="https://www.bea.gov/news/2021/personal-income-and-outlays-october-2021">consumers are on a spending spree</a> after having spent most of 2020 at home bingeing on Netflix. Now that more people are vaccinated, many feel increasingly confident going to the stores again and are demanding more goods and services. </p>
<p><a href="https://www.nytimes.com/2021/06/02/us/politics/stimulus-checks-economic-hardship.html">Adding support to households’ buying power</a> are the stimulus checks and other pandemic-related aid that have gone out to American families during the pandemic. The resulting increase in spending has been good for <a href="https://www.investopedia.com/ask/answers/111314/what-causes-inflation-and-does-anyone-gain-it.asp">stimulating the economy</a>, but more demand typically results in higher prices. </p>
<p>The increased demand might not be too bad for inflation on its own, but the U.S. economy is also <a href="https://abcnews.go.com/Politics/whats-causing-americas-massive-supply-chain-disruptions/story?id=80587129">experiencing significant supply chain problems</a> tied to the COVID-19 pandemic. This is driving up the cost of production and reducing the supply of goods, also pushing up prices. </p>
<p>What’s more, wages are jumping as well – <a href="https://www.bls.gov/news.release/empsit.nr0.htm">up 4.8% in November</a> from a year earlier – as employers in many industries offer more money to retain or hire people. This news is great for workers, but companies often have to pass on these higher costs to consumers. </p>
<p><iframe id="6wzps" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/6wzps/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>2. Is inflation always bad?</h2>
<p>Inflation isn’t always bad news. A little bit is actually quite healthy for an economy. </p>
<p>If prices are falling – something known as deflation – companies may be hesitant to invest in new plants and equipment, and unemployment might rise. And inflation can make it easier for some households with higher wages to pay off debts. </p>
<p>However, inflation running at 5% or higher is a phenomenon the U.S. hasn’t seen since the early 1980s. Economists <a href="https://www.haukeconomics.com/">like myself</a> believe that higher-than-normal inflation is bad for the economy for many reasons. </p>
<p>For consumers, higher prices on essential goods like food and gasoline <a href="https://theconversation.com/the-pandemic-has-made-it-even-harder-for-one-in-three-americans-to-obtain-healthy-affordable-food-169985">may become unaffordable</a> for people whose paychecks aren’t rising as much. But even when their wages are rising, higher inflation makes it harder for consumers to tell if a particular good is getting more expensive relative to other goods, or just in line with the average price increase. This can make it harder for people to budget appropriately. </p>
<p>What is true for households is true for companies as well. Businesses see the prices of key inputs, like oil or microchips, rise. They may want to pass on these costs to consumers, but could be limited in their ability to do so. As a result, they may have to cut back production, increasing supply chain problems.</p>
<h2>3. What are the biggest risks?</h2>
<p>If inflation stays elevated for too long, <a href="https://www.investopedia.com/articles/insights/122016/9-common-effects-inflation.asp">it can lead to something economists call hyperinflation</a>. This is when expectations that prices will be keep rising fuels more inflation, which reduces the real value of every dollar in your pocket.<br>
In the most extreme cases – think <a href="https://www.theguardian.com/money/2016/may/14/zimbabwe-trillion-dollar-note-hyerinflation-investment">Zimbabwe in the late 2000s</a> – spiraling prices can lead to a collapse in a currency’s value. People will want to spend any money they have as soon as they get it for fear that prices will rise even over short periods of time.</p>
<p>The U.S. is nowhere near this situation, but central banks like the Federal Reserve want to avoid it at all costs so they typically step in to try to reduce inflation before it gets out of control. </p>
<p>The problem is the main way it does that is by raising interest rates, which slows the economy. If the Fed is forced to raise interest rates too quickly, it can even cause a recession and result in higher unemployment – as the <a href="https://www.federalreservehistory.org/essays/recession-of-1981-82">U.S. experienced in the early 1980s</a>, around the last time inflation was this high. Then-Fed chair Paul Volcker did manage to rein in inflation from as high as about 14% in 1980 – at the <a href="https://www.stlouisfed.org/publications/regional-economist/january-2005/volckers-handling-of-the-great-inflation-taught-us-much">cost of double-digit unemployment rates</a>.</p>
<p>Americans are not yet seeing inflation nearly that high, but preventing the U.S. from getting there <a href="https://theconversation.com/jerome-powell-keeps-his-job-at-the-fed-where-hell-be-responsible-for-preventing-inflation-from-spiraling-out-of-control-without-tanking-the-economy-171812">is almost certainly on the mind</a> of Jerome Powell, who currently leads the Fed.</p>
<p>[<em>You’re smart and curious about the world. So are The Conversation’s authors and editors.</em> <a href="https://memberservices.theconversation.com/newsletters/?source=inline-youresmart">You can read us daily by subscribing to our newsletter</a>.]</p><img src="https://counter.theconversation.com/content/173572/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>William Hauk has received funding from the Center for International Business Education and Research (CIBER), which is administered by the U.S. Department of Education. </span></em></p>Inflation is rising at the fastest pace since Ronald Reagan was president.William Hauk, Associate Professor of Economics, University of South CarolinaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1681062021-09-16T14:59:28Z2021-09-16T14:59:28ZRising inflation: unless we act now, it will not be temporary<figure><img src="https://images.theconversation.com/files/421585/original/file-20210916-21-1h8nn56.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Up she goes. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/food-price-increase-grocery-bill-rise-1250958577">Lightspring</a></span></figcaption></figure><p>Consumer price inflation in the UK <a href="https://www.theguardian.com/business/2021/sep/15/uk-inflation-in-record-august-jump-as-food-and-drink-prices-rise">rose by 3.2%</a> year on year in August, the highest annual rise in nearly a decade. This was 1.2 percentage points above the July number, making it the biggest month-on-month rise since records began in 1997. Inflation is also an issue far beyond the UK: <a href="https://tradingeconomics.com/united-states/inflation-cpi">in the US</a>, it is currently running at 5.3%, for instance. </p>
<p>Bank of England economists <a href="https://www.ft.com/content/144460b0-887a-408f-89b6-e629cadd617f">conveniently attribute</a> these hefty rises to temporary factors and claim that inflation will soon stop rising in the UK without much intervention. They point out that prices a year ago were artificially subdued and as they returned to more “normal” levels, we were destined to get high measures of inflation. </p>
<p>One example would be <a href="https://www.racfoundation.org/data/uk-pump-prices-over-time">petrol prices</a>. Subdued demand for commuting helped to lower them to about 113p per gallon at the pump in 2020, yet as travel returned to pre-pandemic levels, increased demand for petrol has pushed prices to around 135p. Or you could look at the <a href="https://theconversation.com/eat-out-to-help-out-crowded-restaurants-may-have-driven-uk-coronavirus-spike-new-findings-145945">Eat Out to Help Out</a> scheme, which lowered the prices people paid in restaurants in summer 2020. As the scheme ended, prices hiked suddenly, which increased inflation. </p>
<p>The argument from the optimists is that these one-off shifts will wash through the system and prices will stabilise at their current levels. Yet not all price hikes can be attributed to temporary factors. There are also deeper, structural factors at play.</p>
<h2>What causes inflation</h2>
<p>Inflation is measured by the Office for National Statistics, which records the prices of thousands of products. These prices are defined by a never-ending interplay between supply and demand in the economy (assuming the government doesn’t intervene to fix prices in some way). </p>
<p>An abundance of excess produce or services means that prices are likely to fall, as we saw with petrol prices. On the other hand, demand for products that can’t be fully satisfied by the supply usually pushes prices higher. This happened with <a href="https://www.chargedretail.co.uk/2020/07/06/hand-sanitiser-prices-400-on-average-during-height-of-pandemic-as-cma-warns-price-gougers/">hand sanitisers</a> in 2020, for instance, and more recently with <a href="https://www.ft.com/content/f32ea2ee-bc7b-44ff-b276-0a68275d01ae">second-hand cars</a>.</p>
<p><strong>Ten years of UK inflation</strong></p>
<p>Besides COVID, Brexit has certainly affected prices. It has <a href="https://www.theguardian.com/business/2021/jun/26/recipe-for-inflation-how-brexit-and-covid-made-tinned-tomatoes-a-lot-dearer">rendered trade</a> with the UK’s neighbouring countries more difficult and expensive. This is contributing to shortages of products, pushing prices up. </p>
<p>Brexit has also hindered production in the UK by alienating a percentage of EU nationals working in the country. <a href="https://theconversation.com/three-things-that-could-help-save-christmas-2021-from-shortages-167072">Shortages of</a> fruit pickers, lorry drivers and NHS nurses have been pushing wages higher and making UK production more expensive. And there is the potential for more political and trade disruptions between the UK and EU, not least over <a href="https://theconversation.com/irish-sea-border-trust-is-the-biggest-problem-for-the-northern-ireland-protocol-164355">Northern Ireland</a>, which could make products and production even more expensive.</p>
<p>Another structural factor relevant to inflation is the British pound. The UK imports hundreds of billions of pounds worth of consumer products and raw materials. A lower pound sees the country paying more of its currency to purchase products from abroad, making these products more expensive in pounds. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/421588/original/file-20210916-23-1tatcm6.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Woman holding an open purse in one hand and a pound coin in the other." src="https://images.theconversation.com/files/421588/original/file-20210916-23-1tatcm6.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/421588/original/file-20210916-23-1tatcm6.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/421588/original/file-20210916-23-1tatcm6.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/421588/original/file-20210916-23-1tatcm6.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/421588/original/file-20210916-23-1tatcm6.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/421588/original/file-20210916-23-1tatcm6.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/421588/original/file-20210916-23-1tatcm6.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Doesn’t buy you much these days.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/hands-holding-british-pound-coin-small-369962102">Yulia Grigoryeva</a></span>
</figcaption>
</figure>
<p><a href="https://theconversation.com/brexit-uk-pound-has-not-crashed-yet-but-heres-why-it-will-probably-suffer-in-years-to-come-152646">The pound</a> has already been weakening against its rivals for several years due to economic factors like weaker productivity. This falling trajectory is also likely to continue due to political factors such as the looming second Scottish independence referendum and civil unrest in Northern Ireland. </p>
<p>Also, as the Bank of England keeps turbocharging the economy with vast amounts of money through <a href="https://www.ft.com/content/da550a79-5284-4bc1-96f9-f0eb8b6fed33">quantitative easing (QE)</a>, there should be downwards pressure on the value of the pound. The only thing that spares the pound from big falls is the fact that central banks of other major currencies are doing the same – for the time being. </p>
<p>Loose monetary policy also potentially contributes to higher inflation for another reason. Record low interest rates encourage consumers to borrow, while <a href="https://www.economicsonline.co.uk/Global_economics/Quantitative_easing.html#:%7E:text=QE%20can%20work%20in%20a,wealth%20effect%20for%20asset%20holders.">QE encourages banks</a> to lend more, since it boosts the value of the assets on their balance sheets. This can fuel demand for products such as cars, electronics and white goods (such as washing machines, dishwashers and fridges). Indicatively, though house prices are (wrongly) not counted in consumer price inflation, low interest rates <a href="https://www.bbc.co.uk/news/business-15198789">have contributed</a> to substantially higher prices in that market, as well as in <a href="https://tradingeconomics.com/united-kingdom/stock-market">stock market shares</a>.</p>
<h2>Where we go from here</h2>
<p>A little inflation in an economy can be positive, to the extent that it spurs consumers to buy things before the price rises. It is also a way of lowering the government’s debts in real terms, which is attractive after the <a href="https://tradingeconomics.com/united-kingdom/government-debt-to-gdp">massive borrowing</a> to pay for the COVID stimulus package. </p>
<p>High inflation is a problem, though, as it erodes people’s real incomes, meaning they consume less and businesses make less money. This is why the Bank of England was granted independence from the UK government in the 1990s, with a mandate to keep inflation around 2%. </p>
<p>The UK government and Bank of England should therefore work to address some of the longer term, structural factors which can pin inflation consistently high –particularly when “supply shocks” like a new COVID variant or trade sanctions on China could further imbalance supply and demand in the short to medium term. </p>
<p>Shortages of people and skills in the labour market must be addressed before the production capacity of the UK <a href="https://www.theguardian.com/politics/2021/jan/30/uk-firms-plan-to-shift-across-channel-after-brexit-chaos">is scarred</a> by more businesses relocating and outsourcing production. Through Brexit, the UK public voted to take control of migration, not shut it down when it’s needed. </p>
<p>Free trade in products and services with UK’s neighbouring continent is also paramount for the country’s long-term competitiveness, but here things are admittedly difficult. The EU will never accept the existential danger of a country benefiting from its massive free market without fully subscribing to its policies and regulations. Damage control seems to be the only way forward here, which underlines the importance of reaching a lasting agreement with the EU over Northern Ireland. </p>
<p>Finally, the Bank of England should consider taking its foot off the QE accelerator sooner rather than later, before inflation expectations <a href="https://www.theguardian.com/business/2021/may/13/top-bank-of-england-economist-warns-of-1970s-style-price-inflation">are crystallised</a> into further price increases. Money that is too abundant and ultra-low interest rates not only inflate asset prices but also boost corporate borrowing and provide a temporary lifeline to <a href="https://theconversation.com/concern-is-mounting-about-zombie-companies-why-that-matters-for-the-economic-recovery-158554">zombie companies</a>, laying the groundwork for the next crisis.</p><img src="https://counter.theconversation.com/content/168106/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alexander Tziamalis does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Inflation in the UK in August rose at the highest rate in a decade.Alexander Tziamalis, Senior Lecturer in Economics, Sheffield Hallam UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/918742018-02-14T15:18:00Z2018-02-14T15:18:00ZWhy does inflation make stock prices fall?<figure><img src="https://images.theconversation.com/files/206392/original/file-20180214-174982-1obv4hh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Even the big, bad Wall Street bull is scared of inflation.</span> <span class="attribution"><span class="source">AP Photo/Richard Drew</span></span></figcaption></figure><p>Stock markets <a href="https://www.nytimes.com/2018/02/08/business/stock-market-activity.html">have been on a wild ride</a> recently, plunging one day and then soaring the next. </p>
<p>Pundits have <a href="https://www.theguardian.com/business/2018/feb/06/stock-markets-dow-jones-five-key-factors">offered many reasons</a> for the biggest stock market swoon in two years. One of the most frequently blamed culprits was the <a href="https://www.theguardian.com/business/2018/feb/08/dow-jones-sinks-again-as-bond-yields-rise-and-higher-inflation-feared">threat of inflation</a>, which loosely means an increase in consumer prices over time. </p>
<p>That threat became a little more real after the latest data, released on Feb. 14, showed <a href="https://www.bloomberg.com/news/articles/2018-02-14/u-s-consumer-prices-rise-more-than-forecast-on-apparel-costs">inflation in January</a> rising more than expected, sending stocks and bonds lower. </p>
<p>What would prompt something so seemingly banal to send investors into a state of craziness and even panic? A closer look at inflation – a topic <a href="https://scholar.google.com/citations?user=1E8KAEsAAAAJ&hl=en&oi=sra">I’ve studied closely</a> – and how it affects markets offers some answers. It also hints that an economic slowdown is closer than you may think. </p>
<h2>What is inflation?</h2>
<p>Inflation is defined as the rate of change in the prices of everything from a bar of <a href="https://www.bls.gov/cpi/questions-and-answers.htm#Question_7">Ivory soap to the costs of an eye exam</a>. </p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/205901/original/file-20180212-58324-u6qi8r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/205901/original/file-20180212-58324-u6qi8r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=1229&fit=crop&dpr=1 600w, https://images.theconversation.com/files/205901/original/file-20180212-58324-u6qi8r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=1229&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/205901/original/file-20180212-58324-u6qi8r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=1229&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/205901/original/file-20180212-58324-u6qi8r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1544&fit=crop&dpr=1 754w, https://images.theconversation.com/files/205901/original/file-20180212-58324-u6qi8r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1544&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/205901/original/file-20180212-58324-u6qi8r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1544&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Better, worse, same? It’s all in the CPI.</span>
<span class="attribution"><span class="source">Mega Pixel/Shutterstock.com</span></span>
</figcaption>
</figure>
<p>In the U.S., we measure inflation using something called the <a href="https://www.bls.gov/cpi/">consumer price index</a>. Simply put, the CPI is the average price of a basket of goods and services that households typically purchase. It’s used throughout the economy, for example to set pay raises or to adjust benefits for retirees. </p>
<p>The CPI increased 0.5 percent in January from the previous month on a seasonally adjusted basis, more than economists had forecast and the most since September. </p>
<p>Over the previous 12 months, the index gained about 2.1 percent on a nonseasonally adjusted basis, meaning the price of most <a href="https://www.bls.gov/opub/ted/2018/consumer-price-index-2017-in-review.htm">goods and services</a> rose by about that amount on average during the period. Some, such as hospital services, <a href="https://www.bls.gov/news.release/cpi.t07.htm">climbed at a faster pace</a> than the average (6 percent), while other categories rose more slowly or even declined, such as airline fares, which fell 5.1 percent. </p>
<p>Although inflation is <a href="https://data.bls.gov/pdq/SurveyOutputServlet?request_action=wh&graph_name=CU_cpibrief">still fairly low today</a>, this hasn’t always been the case. In 1979, inflation <a href="https://www.minneapolisfed.org/community/financial-and-economic-education/cpi-calculator-information/consumer-price-index-and-inflation-rates-1913">exceeded 11 percent</a>, a trend that persisted into the early 1980s. </p>
<p><a href="https://www.msn.com/en-us/news/other/the-stock-market-is-worried-about-inflation-should-it-be/ar-BBIPsXU">Some observers</a> are now worried it’s about to start accelerating again. </p>
<h2>The present value of money</h2>
<p>So what spooks stock investors about inflation? To answer that, let’s examine the two ways inflation directly affects stock prices. The first concerns how we value future income. </p>
<p>When you purchase a stock, for example in Walmart or IBM, you are actually buying a long stream of future cash flows based on the profits of the company. The value of the company (and its stock price) is based on how much these future cash flows are worth today, a finance concept called “<a href="https://www.investopedia.com/terms/p/presentvalue.asp">present value</a>.” The present value of any sum of money expected to be collected in the future is computed by factoring in the impact of interest rates and inflation.</p>
<p>For example, let’s say you win the lottery and you’re offered either US$10,000 in a year’s time or $9,600 right now. What should you do? Well, if you’re acting rationally and you don’t have any urgent debts that need paying off, you would try to determine what that $10,000 is currently worth. To do so, you would divide it by 1 plus the interest rate you could readily get at a bank, let’s say 3 percent (we’re assuming that there is no inflation). So the present value of $10,000 a year from now would be $9,709 – which means it’s best to be patient and wait, rather than take the money now.</p>
<p>Now let’s imagine the same scenario but with inflation, which is expected to be 2 percent during the period. Inflation causes the bank rate to be 5 percent, and as a result that 10 grand is actually worth only $9,524 today. In which case, take the $9,600. </p>
<p>Because inflation made the “discount rate” higher, the value today of the future $10,000 was reduced. The same thing happens to stocks. Since a stock’s price is just the risk-adjusted present value of the company’s future cash flows, a rise in inflation will cause it to drop as well. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/205903/original/file-20180212-58339-8z3dx3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/205903/original/file-20180212-58339-8z3dx3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/205903/original/file-20180212-58339-8z3dx3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/205903/original/file-20180212-58339-8z3dx3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/205903/original/file-20180212-58339-8z3dx3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/205903/original/file-20180212-58339-8z3dx3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/205903/original/file-20180212-58339-8z3dx3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">When investors buy Walmart stock, they’re really buying the expectation that all these customers will keep coming back and generating cash flows in the future for the company.</span>
<span class="attribution"><span class="source">AP Images for Walmart/Gunnar Rathbun</span></span>
</figcaption>
</figure>
<h2>Inflation’s flip side</h2>
<p>A second way inflation directly affects stocks has the opposite effect. That is, it should cause them to increase in value.</p>
<p>Rising prices means companies are able to make more money from every computer game, sofa or pastry they sell. A baker, for example, who sold bread for $5 a loaf increases the price to $5.50 because of strong demand. While the cost of the flour and yeast may have also climbed at the same pace, the baker still makes more money because profit goes up too. </p>
<p>That leads to higher future cash flows and thus a higher present value today.<br>
These two effects of inflation should in theory cancel each other out. And yet stock prices are usually <a href="https://www.usatoday.com/story/money/markets/2018/02/09/treasury-bond-yield-spike-spooks-stock-market-bulls/320946002/">hammered</a> when inflation rises. So what’s going on?</p>
<p>There’s lots of <a href="https://www.marketwatch.com/story/this-contrarian-investment-is-the-best-hedge-against-inflation-2018-02-08">evidence</a>, including my own <a href="http://www.jstor.org/stable/3594994?origin=crossref">research</a>, that many investors suffer from something called “inflation illusion.” They worry about the present value effect of inflation of stocks but they ignore the growth in cash flows and profits that result from higher inflation. This results in stock prices falling when they shouldn’t.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/205846/original/file-20180211-51716-1fmg12i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/205846/original/file-20180211-51716-1fmg12i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/205846/original/file-20180211-51716-1fmg12i.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/205846/original/file-20180211-51716-1fmg12i.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/205846/original/file-20180211-51716-1fmg12i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/205846/original/file-20180211-51716-1fmg12i.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/205846/original/file-20180211-51716-1fmg12i.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Stock markets have been a sea of red lately.</span>
<span class="attribution"><span class="source">AP Photo/Sadiq Asyraf</span></span>
</figcaption>
</figure>
<h2>Slowdown on the horizon</h2>
<p>However, there’s a third, indirect way inflation affects stocks. And this might be what is causing the concerns in the markets today. This effect has inflation playing the role of a canary in a coal mine, warning that bad times are coming.</p>
<p>To understand this, we have to consider how inflation varies through the <a href="http://www.nber.org/cycles.html">business cycle</a>, which is a way of measuring the growth of the economy from the beginning of an expansion to the end of a recession. </p>
<p>At the beginning of a cycle, inflation is often low. (It was practically <a href="https://www.thebalance.com/u-s-inflation-rate-history-by-year-and-forecast-3306093">nonexistent or even negative</a> following the financial crisis of 2008.) But as the economy heats up and people have more money to spend (as is the case now), companies begin to sell more goods and services at steadily increasing prices, earning <a href="http://money.cnn.com/2017/12/22/investing/corporate-profits-2017-wall-street/index.html">higher profits</a>, while <a href="https://www.reuters.com/article/us-usa-economy/u-s-jobless-claims-drop-to-near-45-year-low-idUSKBN1FS23K">most people are able to find work</a>. </p>
<p>As more stuff is being created and sold in the economy, the demand for raw materials and workers increases. Besides pushing up prices, this can also result in higher wages. The fastest increase in take-home pay in nine years was another “warning sign” that <a href="https://slate.com/business/2018/02/why-rising-wages-scare-the-heck-out-of-stock-market-investors.html">spooked investors</a> recently. </p>
<p>This is where we are now. If left unchecked, inflation could spike, which would likely cause the economy to slow down quickly and unemployment to increase. The combination of rising inflation and unemployment is called “<a href="https://www.investopedia.com/articles/economics/08/1970-stagflation.asp">stagflation</a>,” and is feared by economists, central bankers and pretty much everyone else. It’s what can cause an economic boom to suddenly turn to bust, as we saw in the late 1970s.</p>
<p>This is where the Federal Reserve steps in. The U.S. central bank has the ability, through various tools, to manipulate short-term interest rates. So before the economic party gets out of hand and stagflation takes hold, the Fed steps in to calm things down by increasing the cost of borrowing in an effort to gradually slow the economy rather than let it crash and burn.</p>
<p>Think of the Fed as the sensible person telling everyone to go home at midnight instead of partying until the early hours. It’ll spoil the fun at midnight, but we’ll all be happier the next day.</p>
<h2>Is the party over?</h2>
<p>Back to the current turmoil. The <a href="https://www.bls.gov/cpi/">latest CPI figures</a> suggest inflation may be accelerating, but it won’t be clear until we get a couple more readings. </p>
<p>For now, it’s mostly just the threat of inflation that’s causing trouble as investors begin to realize that the party is getting a little too crazy and that the Fed is going to step in and slow things down a bit. In other words, inflation is warning sign that an economic slowdown is coming – whether gradually executed by the Fed or abruptly by a spike in inflation.</p>
<p>So if all of this is understood, why did the market crash? Investors, naturally, want to stay at the party as long as they can. It is only when they see others heading for the exits that they realize maybe it’s time they left too, prompting a rush to the door. Thus the market tanks. </p>
<p>This is why a market can appear to be doing great and then suddenly fall at the first hint of inflation.</p>
<p><em>This is an updated version of an article originally published on Feb. 12, 2018.</em></p><img src="https://counter.theconversation.com/content/91874/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard S. Warr does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>While many market observers blame growing concerns about inflation for the stock market crash, the real culprit may be fears that the economy is about to slow.Richard S. Warr, Professor of Finance, North Carolina State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/835952017-09-10T21:24:55Z2017-09-10T21:24:55Z‘Weather-sensitive’ products: adjusting price and promotions to increase sales<figure><img src="https://images.theconversation.com/files/185105/original/file-20170907-9599-9d45t0.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A U.S. supermarket.</span> <span class="attribution"><span class="source">Pexels</span></span></figcaption></figure><p>It stands to reason that the weather can affect the sales of certain products – for example, more rainfall generally means that consumers purchase less sunscreen. But the phenomenon can go much further. In the UK market, warm summer weather led to a sales increase of <a href="http://www.dailymail.co.uk/money/markets/article-4645178/Ice-cream-saves-supermarkets-Heatwave-boosts-sales.html">23% for frozen sweets and 10% for chilled drinks</a>. In the US do-it-yourself market, stores reported falling sales of outdoor product categories due to <a href="https://www.forbes.com/sites/greatspeculations/2014/05/27/lowes-earnings-review-outdoor-category-sales-decline-due-to-rough-weather-but-boost-profitability/#3f92f16ed5b3">poor weather</a>. In the automobile industry, sales of convertibles increase by 5.4% when the <a href="https://www.adwordsrobot.com/en/blog/how-weather-influences-product-sales">temperature rises</a>. In the US and Canada, McDonald’s added technology that allowed them to <a href="http://www.businessinsider.fr/us/mcdonalds-menus-will-recommend-food-based-on-the-weather-2015-11/">recommend products</a> based on outside temperatures, but not adjust pricing.</p>
<h2>Optimising profits based on the weather</h2>
<p>Despite the clear influence of the weather on the sales of certain products, firms’ decisions on price, advertising or promotions can often be more a matter of habit than reason. Indeed, several marketing departments’ practices show that the links between the marketing decisions and the weather are still poorly understood. Understanding these links would give them a framework to better take the weather into account, and thus potentially increase sales and profits. </p>
<p>In a <a href="https://www.faculty-psbedu.paris/en/content/when-temperature-rises-and-consumer-cool-down-impact-pricing-and-advertising-strategies">recent study</a>, we help fill this gap by studying how price and advertising expenses can be adjusted to the outside temperature for “weather-sensitive” products.</p>
<p>The mapping of prices of such products on the French market shows discrepancies in the order of 20% within a same geographical region and between regions. Advertising expenditures can be concentrated on certain months of the year, sometimes reaching more than twice the annual average. Our study helps companies understand whether these practices of modulation in price and in advertising expenses are justified and how they can be optimised in relation to outdoor temperature.</p>
<p>Theoretical results of our study show that when the outside temperature increases, price and advertising expenditures should be increased when:</p>
<ul>
<li><p>Demand is relatively <a href="https://en.wikipedia.org/wiki/Price_elasticity_of_demand">insensitive to price changes</a>; </p></li>
<li><p>Demand more sensitive to price changes than to advertising changes – that is, an increase in price impacts demand more than an increase in advertising expenditures of the same intensity.</p></li>
</ul>
<h2>Yop yogurt as the case study</h2>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/185108/original/file-20170907-9570-1sxcnby.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/185108/original/file-20170907-9570-1sxcnby.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=1385&fit=crop&dpr=1 600w, https://images.theconversation.com/files/185108/original/file-20170907-9570-1sxcnby.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=1385&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/185108/original/file-20170907-9570-1sxcnby.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=1385&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/185108/original/file-20170907-9570-1sxcnby.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1740&fit=crop&dpr=1 754w, https://images.theconversation.com/files/185108/original/file-20170907-9570-1sxcnby.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1740&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/185108/original/file-20170907-9570-1sxcnby.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1740&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
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</figure>
<p>We empirically tested our theoretical results for a well-known product in the French <a href="https://en.wikipedia.org/wiki/Fast-moving_consumer_goods">FMCG market</a>, the drinkable yogurt Yop. The data used in our analysis included more than 1,300 sales and price observations over a period of three years at nine different regional levels as well as advertising expenses and outdoor temperature recordings from 1,100 weather stations all over the French metropolitan territory. We studied the relationship between temperature and price on the one hand, and between temperature and advertising expenditures on the other.</p>
<p>Estimates show that Yop’s demand is consistent with our theoretical model. It is not particularly price-sensitive (when price rises by 10%, demand falls only by 5%) and more sensitive to price than to advertising (when advertising expenditures rise 10%, demand increases by less than 1%). Most important, the price and the advertising expenses were shown to increase with the temperature.</p>
<p>In sum, our study can help firms better set prices and advertising expenditures according to temperature. For brand products (monopolistic markets), the warmer it gets, the greater firms’ ability to increase prices and advertising while increasing sales. In such markets, rising temperatures strengthens the market power of brands. For managers and their consulting firms, our study provides conceptual tools confirmed by an empirical analysis that can lead to better-informed price and advertising decisions and, ultimately, improve profits.</p><img src="https://counter.theconversation.com/content/83595/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Les auteurs ne travaillent pas, ne conseillent pas, ne possèdent pas de parts, ne reçoivent pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'ont déclaré aucune autre affiliation que leur organisme de recherche.</span></em></p>Weather has an impact on the sales of certain products, and new research shows that timely adjustments in price and advertising can make it possible for firms to increase profits.Xavier Rousset, Doctorant en Économie, Université Paris CitéOctavio Escobar, Associate Professor of Economics, PSB Paris School of BusinessRégis Chenavaz, Enseignant-chercheur en économie et marketing, Kedge Business SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/781352017-05-30T13:54:37Z2017-05-30T13:54:37ZClues and solutions to Kenya’s puzzling food price crisis<figure><img src="https://images.theconversation.com/files/170554/original/file-20170523-5782-znzjjz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Roasted maize for sale in Nairobi as grain prices reach historic highs in Kenya.</span> <span class="attribution"><span class="source">Reuters/Noor Khamis</span></span></figcaption></figure><p>Governments everywhere have the twin responsibility of ensuring that food prices are affordable for the majority of people, while guaranteeing good margins for producers. </p>
<p>In practice, many opt to subsidise producers of staple foods. Subsidies usually have the effect of keeping the costs of production low enough to guarantee affordable prices for urban consumers. They may include subsidising the cost of inputs such as seed or fertiliser, or subsidising the output price to maintain an agreed minimum price.</p>
<p>The Kenyan government has from time to time applied input subsidies to reduce the cost of production. But they haven’t always produced the <a href="http://www.tegemeo.org/index.php/resources/publications/166-working-papers/488-working-paper-15-effects-of-government-maize-marketing-trade-policies-on-maize-market-prices-in-kenya.html">desired effect</a>. As a result the producer and consumer prices for maize – a major staple – have always been a subject of anxious debate in Kenya.</p>
<p>Such a debate has been sparked once again by the recent <a href="http://sokodirectory.com/2017/02/rising-food-prices-will-force-kenyans-go-hungry-warns-fao/">price spike</a> in food prices, including maize. Maize and milk consumer prices have soared to new heights, fuelling inflation which now stands at a <a href="http://www.knbs.or.ke/index.php?option=com_content&view=article&id=435:cpi-and-rates-of-inflation-for-april-2017&catid=82:news&Itemid=593">six-year high</a>.</p>
<p>The high and rising consumer prices are all the more worrying because prices of imported food commodities have largely <a href="http://www.agricultureauthority.go.ke/statis/">been stable</a>. Kenya imports approximately 75% of the rice and wheat consumed. </p>
<p>The <a href="http://www.fao.org/giews/food-prices/regional-roundups/detail/en/c/884858/">increases in prices </a>, especially for maize, are not unique to Kenya. As a result of prolonged drought in large parts of the East African region, maize prices rose significantly in 2017, especially between January and April. But Kenya has the highest <a href="http://www.cggc.duke.edu/pdfs/2016-09-29_IGC%20Maize%20Report_Final.pdf">per capita maize consumption</a> in the region and therefore suffers a greater burden due to the price hikes.</p>
<h2>The latest crisis</h2>
<p>Kenya’s on-going consumer food price crisis – particularly of maize and maizemeal – is just the latest evidence of a litany of policy failures. </p>
<p>In a bid to curb rising prices, the government imposed an <a href="https://gain.fas.usda.gov/Recent%20GAIN%20Publications/Grain%20and%20Feed%20Annual_Nairobi_Kenya_3-21-2017.pdf">export ban</a> in January. Policymakers believed that farmers were hoarding stocks and were likely to sell to markets such as South Sudan which offered better prices. The expectation was that maize stocks would be made available, easing the pressure on prices. </p>
<p>But the price of maize kept rising.</p>
<p>Then in April 2017 the government waived the tariff for imported maize to allow for <a href="http://kenyalaw.org/kenya_gazette/gazette/volume/MTQ3OA--/Vol.CXIX-No.47#GAZETTE%20NOTICE%20NO.%203575">duty-free imports of maize</a>. Considering the time taken to import maize, it will take at least three months for this to affect local prices. </p>
<p>Finally, the government intervened with a <a href="http://www.kilimo.go.ke">food subsidy</a> for packed maize flour under which it pays millers to supply maize flour at a set price to the market. This is meant to be a short term measure until the next harvest. </p>
<p>Kenya has repeatedly intervened in maize markets by supporting producer prices. This is done by setting a price higher than the prevailing market price. For example, in September 2016 the market price of a 90kg bag of maize was 2,300 shillings ($22). The government then announced that it was purchasing maize from farmers at 3,000 shillings ($29). Needless to say the market price in October rose to 3,000 shillings. </p>
<p>There could be better ways of supporting producers. <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1467-7679.2012.00563.x/abstract">Other countries </a>in Asia have offered a guaranteed minimum price for their producers. In such a case, producers receive subsidies when market prices fall below the guaranteed minimum. This motivates producers to focus on reducing their costs of production to improve their margins. </p>
<h2>Kenya and the world</h2>
<p>World maize market prices have been coming down since 2012. But prices in 2017 in Kenya remain much higher, similar to its <a href="http://www.fao.org/giews/food-prices/regional-roundups/detail/en/c/884858/">neighbours</a> due to uncertainties about production as a result of a prolonged drought as well as pest infestations. </p>
<p>But transferring the benefits of low world markets prices is complicated because of common market and preferential trade agreement rules. </p>
<p>For example, being a member of the <a href="http://www.eac.int/">East African Community</a> customs union, Kenya imposes a tariff of <a href="http://www.fao.org/docrep/017/aq374e/aq374e.pdf">50% for maize imported outside the region</a>. Further, non-tariff barriers still exist. As recently as 2016, Tanzania banned maize exports to stabilise local prices. This meant that Kenya couldn’t benefit from Tanzania’s surplus production.</p>
<p>Milk prices have also been rising, reaching <a href="http://www.kdb.co.ke/contact/prices-of-pasteurized-milk.html">historic</a> <a href="http://www.knbs.or.ke/index.php?option=com_content&view=article&id=435:cpi-and-rates-of-inflation-for-april-2017&catid=82:news&Itemid=593">highs</a>, with the spread between farm gate price and consumer prices widening. Kenya currently has the second highest milk prices in Africa after South Africa. </p>
<p>This is also being blamed on a prolonged drought. But that’s only part of the answer. Kenya’s milk industry is dominated by three main players accounting for more than <a href="http://www.renapri.org/wp-content/uploads/2017/03/Tegemeo_Policy-Brief_-No.-24_Dairy_Jan2017.pdf">three quarters of the market</a>. </p>
<p>This means that the leading players can dictate the prices for both producers and consumers. </p>
<h2>What needs to be done</h2>
<p>The failure of subsidies to keep maize prices down can mainly be attributed to design issues. Subsidising fertilisers has, for instance, not <a href="http://www.tegemeo.org/images/downloads/publications/technical_bulletin/Technical%20Bulletin%20-%20Food%20situation%20assessment.pdf">helped smallholder farmers</a>. This is because they face huge costs in accessing the fertiliser. On average, they travel up to 40 km to get to the nearest depot. On top of this, the quantities used by smallholders aren’t big enough to incentivise them to access subsidised fertiliser.</p>
<p>The government should continue <a href="http://www.ascleiden.nl/Pdf/paper07112002.pdf">to invest in</a> in irrigation, roads and markets, particularly in rural areas. But it needs to do more.</p>
<p>It should strength private sector fertiliser markets which has been <a href="http://siteresources.worldbank.org/AFRICAEXT/Resources/258643-1271798012256/YAC_chpt_16.pdf">shown to be effective</a> in getting farmers to access and use fertiliser. </p>
<p>And it should use evidence generated from research to improve the efficiency of policies. For example, the soil quality in grain basket areas has been declining and studies <a href="http://www.tegemeo.org/index.php/2015-08-20-11-15-45/conferences/657-tegemeo-hosts-conference-on-enhancing-smallholder-productivity-in-kenya-evidence-from-a-randomized-controlled-trial-of-new-seed-varieties.html">have shown that it</a> is markedly different, even within a village. But the subsidised fertiliser programme hasn’t taken these factors into account. It should.</p>
<p>There’s also need to improve the forecasting models and make use of their findings. For instance, the current shortfall in production was first forecast more than six months ago. Policy options that could have helped stabilise prices should have been discussed and implemented from the get-go, not when prices were rising.</p>
<p>Another major factor is that most functions in the agriculture sector have been devolved to county governments. This includes the provision of extension services. So special attention needs to be given to better co-ordination between the national and <a href="http://www.tegemeo.org/images/downloads/conferences/2015/Status%20of%20the%20Agricultural%20Sector%20and%20Key%20Lessons%20after%20Devolution%20to%20County%20Governments.pdf">county governments</a>. </p>
<p>To improve returns to producers, the government should provide incentives for primary producers to <a href="https://agriknowledge.org/downloads/f7623c66q">add value</a>. Currently the largest gains go to players higher up the value chain.</p>
<p>And finally, innovative ways to finance farmers should be pursued to ensure that they can access inputs where <a href="http://www.tegemeo.org/index.php/resources/publications/492-working-paper-10-competitiveness-of-kenyan-and-ugandan-maize-production-challenges-for-the-future.html">costs are high</a>. </p>
<p>Kenya can get this right. But only if it’s honest about where it’s failing and holds responsible institutions accountable. A good start would be to fix policies that have led to the perennial crises.</p><img src="https://counter.theconversation.com/content/78135/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kevin O. Onyango, Research Assistant at Egerton University’s Tegemeo Institute of Agricultural Policy & Development, contributed to this report</span></em></p>Kenya’s high consumer food prices are worrying because they are unresponsive to the policies pursued. The country needs to address this and improve planning to attain stability.Timothy Njagi Njeru, Research Fellow, Tegemeo Institute, Egerton UniversityLicensed as Creative Commons – attribution, no derivatives.