Inflation isn’t normally associated with serious social upheaval, at least not in Canada, but recent events have shown that spiralling prices can have profound effects on emerging economies. The chaos in Egypt, much like the uprising in Tunisia earlier this year, can be blamed in part on inflation—namely rising food and energy prices that have left jobless Egyptians feeling desperate.
It’s an especially sharp problem in developing countries where a substantial portion of income is spent on food. But even big global players are growing concerned lately. China, for instance, is worried that rising prices are making the cellphones, dishwashers and clothing churned out by its manufacturing sector less attractive to foreign buyers. And no country, it seems, is more sensitive about inflation than Argentina. Independent firms have pegged inflation there as high as 25 per cent, more than double the official figures, and are reportedly being threatened with government reviews of their methodology and potential fines of $125,000.
What’s behind all this inflation trouble? According to a recent Scotiabank report, the run-up in prices is fuelled mainly by soaring commodities, thanks to a combination of reduced global supplies of everything from grains to vegetable oils (many producers cut capacity during the recession while bad weather has ruined crops) just as demand in many parts of the world is beginning to rise with the recovery. But some have also singled out a weak U.S. dollar as a key culprit. Four months ago, the U.S. Federal Reserve launched a second round of quantitative easing—essentially printing money to juice the economy—by buying US$600 billion in U.S. government bonds. China and other developing nations say the move is causing money to flood into their economies, further pushing up prices of food, energy and other commodities, while also forcing their currencies higher.
Not surprisingly, U.S. Fed chairman Ben Bernanke has dismissed the criticism by blaming developing countries for failing to properly manage their own monetary policies—a fair point, although one that is likely to fall on deaf ears once the citizenry has taken to the streets in protest.