Inflationary pressures: How do they effect emerging economies?

• Inflation affects both developed and poor countries.
  
• Individuals with the lowest income levels have been the hardest hit.
• According to the IMF, inflation will not persist as long as supply networks remain stable.

Rising food and energy costs are tightening household budgets in developing nations, as consumers from the United Kingdom to the United States feel the squeeze of the biggest inflation in decades.

Annual inflation in the United States hit a 40-year high last month, according to official figures released last week, while inflation in the United Kingdom hit a 30-year high of 5.5 percent.

But, as the poorest people in wealthier countries face skyrocketing food and fuel prices, how are emerging economies affected by an inflationary increase driven by higher energy prices and supply bottlenecks due to COVID-19?

What is the situation in the major emerging countries?

According to William Jackson, chief emerging markets economist at Capital Economics, the picture is more mixed than in affluent countries, depending on local conditions.

In Turkey, for example, inflation reached 48.7% in January, owing primarily to the lira's depreciation last year.

Consumer spending in other important emerging countries, such as Brazil, Russia, and Mexico, is rapidly increasing, owing in part to the impact of higher global energy costs.

Last year, they had annual inflation rates of 10%, 8.4%, and 7.4%, respectively.

However, due to supply restrictions associated to the epidemic, not all major emerging markets have seen a significant increase in consumer prices, particularly China, where inflation is running at 1.5 percent.

"Goods shortages haven't had the same effect," Jackson told the Thomson Reuters Foundation. "In China's situation, it helps because it's a global manufacturing powerhouse."

"Many of the materials congregate there, making it easier for producers to obtain those supplies."

What is the impact of inflation on emerging economies?

Rising food costs drive low-income customers to tighten their belts, limiting spending on other products and delaying economic growth in nations where food makes up a higher portion of the inflation basket.

"It appears that consumer spending has declined in those nations with high inflation because household spending power has been eroded by rising prices," Jackson said.

"And you've seen a much more aggressive monetary policy tightening in general."

Several emerging economies, including Brazil and Russia, have raised interest rates to keep inflation in line, putting even more pressure on consumers by increasing borrowing costs.

"(High interest rates) make servicing debt and taking out new loans much more expensive, which weighs on investments, so it's a huge impediment to economic growth," Jackson noted.

What does a high rate of inflation signify in terms of household costs?

Energy and food account for a higher share of the household budget in emerging nations.

As a result, lower-income families are more strained by rising prices, as food and energy consume a larger amount of their household budget.

The minimum wage has been raised in several countries, such as Turkey and Brazil, to assist low-income families.

"What you find in nations where the recovery is weaker and wage growth isn't strong is a significant erosion of spending power," Jackson explained.

He cautioned, however, that while wage increases boost GDP, they can also feed into an inflationary spiral, in which everyone involved in determining prices and wages expects further increases.

Will inflation continue to rise?

According to the International Monetary Fund (IMF), inflationary pressures could diminish in the coming year, with rates in most emerging nations falling below 5%.

Inflation in Turkey is predicted to reduce to over 15% this year, while in Brazil, it is expected to moderate to just over 5%.

However, the IMF warned in January that if supply chain problems continue into 2022, inflation could last longer than planned.