Inflation rate in Ukraine and how do governments of different countries fight it
Massive inflation in all countries of the world began back in 2020 due to massive lockdowns. In order to save human lives, the governments of many countries have stopped production and businesses, limiting the movement of people and the logistics of enterprises. The result of this approach was a significant slowdown of the global economy and the bankruptcy of businesses. It was expected that by 2023, the world economy would begin to emerge from recession, but due to the full-scale russian invasion of Ukraine, the world was again faced with negative economic consequences. In this blog, I will look at how inflation affects different countries and what ways governments are using to reduce it.
Inflation is accelerating almost all over the world: the Baltic countries have reached a rate of over 20%, Turkey has crossed 80%, the EU countries, and the UK at about 10%. The traditional raising of the discount rate is considered an effective tool in restraining inflationary processes. In addition, the European trend to freeze wages is noticeable, which is also relevant for Ukraine. Such actions may result in the displeasure of the population, but it is an efficient way to slow down inflationary tendencies. Of course, the support of people by the state and an increase of assistance through social programs in this situation will grow.
Inflation in the European Union area reached 8.9% in July this year compared to the previous month. The reasons were high energy prices and the russian war. Already in September, the ECB leadership suggested that the key rate could be raised by 2% at one time. Energy prices have risen by about 36% year on year, which reduces people’s purchasing power and is the eurozone’s biggest problem. The government is trying to ease this effect on ordinary citizens through various levers, such as lower ticket prices for public transport and lower taxes on fuel. To fight inflation, the EU Central Bank initiated a 75-point increase in its key interest rate. Thus, the ECB plans to reach the projected medium-term inflation rate of 2%. A similar trend can be seen in the United Kingdom. Consumer prices in the UK rose 10% in July compared to the same period last year, and this is the worst performance in 40 years.
Due to the biggest increase in energy and food prices in decades and the imbalance of supply and demand, U.S. inflation rose in the first half of the year but slowed to 8.5% in July from 9.1% in June. This was less than forecast, and the slowdown was the first in 5 months. The situation has somewhat stabilized due to the fact that the FRS raised the discount rate by 75 points for the first time in 28 years. Those steps were supposed to stop inflation, but the two-month trend, while showing up at 8.3%, did not stop the CPI from rising. Now we should expect the FRS to intervene again and raise the discount rate. The invasion of Ukraine creates additional difficulties in the U.S. due to sanctions and changes in the supply chain of raw materials and food, which affects economic activity. It can be noted that the FRS reacts more quickly compared to the ECB, this can be seen in the almost equal dollar/euro exchange rates.
The full-scale invasion impacted Ukraine the most, already now the NBU forecasts annual losses of up to 30% of GDP. In such a situation, the key rate remains at 25% after it was raised to this level in June. At the same time, inflation accelerated to 22.2% year-on-year and to 23.8% in August, which is lower than forecasted. It should be noted that according to the July forecasts of the NBU, inflation may reach 30% by the end of this year. Expectations for its growth remain quite high, so we can make a cautious prediction that the key rate will remain at the same level at least until the end of the year. Taking into account the war and its consequences, the expected rate of inflation next year will be close to 20%, and in 2024 — slightly less than 10%. It should be taken into account that such a high level of inflation will lead to the adjustment of the budgets of the following years with adjustments for additional expenses related to the stabilization of price growth and the weakening of the national currency.
Most likely, the global inflation trend will continue due to a reduction in the supply of certain goods on the market, upward pressure on demand, as well as increased costs of business related to logistics. Most countries are acting in roughly the same scenario for overcoming the crisis situation — raising the discount rate, freezing wages, and expanding government assistance projects for the population.