The Four P’s of Inflation: Politics, Policies, Priorities, and Poverty

Let me tell you a story: The year is 1933. The German economy is in shambles. The war has left the country battered and bruised. The Treaty of Versailles has forced Berlin to pay war reparations. How much? 132 billion Gold Marks. That’s around 31.4 billion US Dollars. Germany is in massive debt. Germans are demoralized. There is social unrest. Two successive rounds of elections have failed to restore stability. There’s post-war hyperinflation. There is unemployment. There are massive social, political, and  economic uncertainties. Adolph Hitler and the Nazi party decided to exploit this crisis. On January 30, 1933, Hitler is sworn into power as the new leader of Germany. The rest as they say is history.

Moral of the story: financial distress and inflation have the power to change the course of history. In this article, I will attempt to tell you what's happening around the world. How stocks are falling, how currencies are losing their value, how fuel is becoming more valuable, how prices of basic commodities are going up. I will attempt to tell you what inflation really means on broader terms. Not inflation for your purchasing power nor the money in your bank. But for today’s world that we live in.

What does inflation mean for the world order? Our world is a conglomeration of democracies, authoritarian regimes, and constitutional monarchies. Will it remain this way past this situation? Today, our world is interconnected. It's tightly knit. There is free flow of trade. Will it remain this way after this financial crisis eventually passes?

Inflation affects politics, policies, global priorities, and poverty. The four Ps. : Politics, Policies, Priorities, and Poverty. I will talk about all four, starting with the first P: Politics. Inflation is often called the mother of political change. I briefly explained what happened in post-war Germany. With Europe at war again, these hostilities has contributed to inflation. There are protests around the world due to the economic conditions. Protesters can be unforgiving. Ask former US President Jimmy Carter. When he was in office, oil and food prices had shot up. Unemployment and inflation brought Carter down. He lost re-election to Ronald Reagan. Today, food prices in the US are up 20%, fuel prices are up 10%, although coming down. And came November of 2022. Joe Biden faced midterm elections. The Democrats lost the House but narrowly retained the Senate. Chances are, inflation may steal the 2024 presidential election from Biden. This could well change the course of American politics!

Now that you understand what inflation can do to governments, consider this: Depending on where you live, global inflation is over 15%. Aggregate food prices have gone up at least 13%, again depending on where you live. About 50 countries go to the polls this year and the next. This includes US, Brazil, Israel, Pakistan, Bangladesh, Turkey, etc. If prices continue to rise, these leaders may find themselves out of office because rising prices can topple governments. They can also change the fate of a country.

Look at Venezuela. It has the largest oil reserves in the world. But where is it on the global map? It's in the grasp of a political crisis plus and unfathomable hyperinflation. Between 1973 and 2022, prices in Venezuela have gone up by 3,729%. Let that sink in. This is not the worst number. According to the World Bank, in February 2019, inflation in Venezuela had reached 344,509%. By then, the Venezuelan currency was junk. They said using cash as toilet paper was more prudent than buying a toilet paper roll! What happened there? More than six million Venezuelans left home. That's nearly 20 % of the country's population.

What was once the richest country in Latin America is now struggling to stay relevant. No country wants to meet that fate. No country wants to be wiped out by inflation. So what do they do?

We come to the second P: Policies. Counties change their policies or should I say inflation forces countries to change policies. Many countries have banned the export of certain food items. Since the start of the Ukraine conflict, Argentina has banned the export of soybean, oil, and meat. Algeria: pasta, wheat derivatives, vegetable oil, and sugar. Egypt: vegetable oil, base wheat, flour, oils, lentils, pasta, and beans. Indonesia: palm oil and palm kernel oil. Serbia: wheat, corn flour, oil, corn, vegetable oil. The world as a whole has increased the prices of all these commodities. For the governments worldwide, the priority is to control prices at home to ensure food security, because hungry voters can be unforgiving and no government wants to risk their wrath. So come inflation, trade policies invariably become more nationalistic and more protectionist. The domestic market become the priority. Sometimes diplomacy takes a backseat, speaking of which inflation also tends to force a shift in diplomacy.

Let's consider Europe. Inflation in the Eurozone has touched a record high. What's the Eurozone? It's a monetary union of 20 EU counties. Currently, there are 27 countries in the EU. Seven of these are not part of the Eurozone. The rest have the Euro as their primary currency and their sole legal tender. Currently inflation in the Eurozone is at its highest since the creation of the Euro. When was that? The year 1999. It means the inflation has touched a three-decade high, courtesy of the Ukraine conflict. A survey published in June of 2022 asked the Europeans [across 10 countries], what they thought of the Ukraine conflict. More than a third said they wanted it to be over as soon as possible, even if that meant Ukraine conceding land. This conflict has affected the day-to-day lives of hundreds of millions of Europeans. More than 40% of the Europe’s gas comes from Russia. So does 26% of their oil. Sanctions against Russia and bans on Russian Imports have hit the Europeans hard. Come this winter, they will need to heat their homes and not everyone will able to afford a sky high energy. The war has made meals expenses. In Italy, pasta prices are up 40%! So it's not surprising that Europeans are almost equally split when it comes to the Ukraine conflict. Others say they want “justice”.

At the recent NATO and G7 summits, European leaders pledged to support Ukraine at any cost. But not every voter is ready to bear this cost. Pollsters say the survey will affect European policy sooner rather than later.

Europe needs to rethink its priorities which brings us to the third P: Priorities. Inflation forces shift not only in national priorities, but also global priorities. Consider climate change. Making climate action as a global priority is not easy. It took a lot of “climate cops” to convince the world to go green. Inflation has reversed this. Coal goes big as inflation hits the energy sector. Europe may shift back to coal. Austria re-opens coal-fired stations despite climate goals. Experts warn of climate risks. US makes a u-turn on green promises. When inflation hits energy, when diesel and gas become expensive, countries lean on cheaper energy sources like coal. Even if that means polluting the Earth and accelerating climate change.

Never thought inflation contain so much, did you? That's the thing. We tend to limit the definition of inflation to a change in purchasing powers. While price rise is definitely the fundamental meaning of inflation, also the first fallout. Inflation changes more than the money in your bank account and that's the point I am trying to make.

So let's wrap with the final P: Poverty. 1.1 billion people around the world cannot afford essentials like food. They live below the poverty line. With the rise in prices, more people are pushed into poverty which has its own set of social problems like malnutrition, miscarriage, infant mortality, crime, joblessness. Inflation sets off a chain reaction, one that takes years to stop. That’s inflation 101 for you.