Why inflation is the cruelest tax of all

Why inflation is the cruelest tax of all

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In recent weeks the more affluent parts of the world have been operating on the assumption — the accuracy of which remains unsubstantiated — that the COVID-19 pandemic, having sown immeasurable pain and destruction, is about to come to an end or at least become less harmful, and we shall be able to resume life as we knew it before its outbreak two years ago.

However, any hope of a calm after the storm, in the shape of an emergent global society that is more reflective and united in its goal to avoid conflict and discord, is fast evaporating. One of the major challenges to this goal is the impact of price rises across the globe that are disproportionately affecting the poor and the lower middle class, and have far-reaching political implications as much as economic ones.

Inflation across large parts of the developed world is increasing rapidly. Among the countries of the Organisation for Economic Cooperation and Development, it reached its highest rate since May 1996, surging to 5.8 percent in the year to November 2021 compared with just 1.2 percent in November 2020. Notably, this rise was even sharper in the US, where year-on-year inflation rose from 6.2 percent in October to 6.8 percentin November, the highest rate since June 1982. The eurozone was not that far behind, with an increase of 4.9percent in November. Much of this spike is attributed to energy prices, which have climbed by 27.7 percent in the 38 OECD member countries. Nevertheless, there have also been price hikes in food, housing, transport, and other services — all of which is putting severe pressure on household budgets across the world.

This particular inflation is due in part to the economic stimulus packages delivered by governments rightly attempting to soften the economic body blows that the coronavirus caused to businesses, especially small ones, and to individuals who lost their jobs. This also led to a faster recovery, which is probably unsustainable, but is most worrying in that it is far from being evenly spread and benefiting most people. World Bank figures show that in the first year of the pandemic the poorest lost a great deal more of their income than the richest, and in 2021 the more affluent have recovered nearly half of their 2020 losses, while the poorest are expected to lose a further 5 percent of their income.

Compared with more affluent families, low-income households are more sensitive to even small price rises that can push them deeper into the poverty trap.

Yossi Mekelberg

Not only have low-income people suffered disproportionately from COVID in health terms, but their economic situation has deteriorated as well, as they are employed in sectors such as tourism and entertainment that were suspended, and they could not work from home, or because they live in countries that could not afford generous economic programs to sustain them. According to the aid charity Oxfam, during the pandemic the 10richest people in the world more than doubled their fortunes and now possess $1.5 trillion dollars, while 2.3 billion people worldwide live in poverty.

Sharp price increases can only worsen this situation, as the economist Eliana Cardoso pointed out in her seminal 1992 work on inflation, which she described as “the cruelest tax.” It wipes out the savings of the middle classes and pushes many of them below the poverty line, and in the process increases inequalities in society. Inflation exacerbates existing pressures on household budgets, with a higher burden on poor households who spend most of their scarce resources on the most essential goods and services, including food, energy, or transport, leaving almost no room to alter their hand-to-mouth consumption pattern without an immediate and painful impact on their well-being, and  a negative impact especially on their children in terms of health and education.

Compared with more affluent families, low-income households are more sensitive to even small price rises that can push them deeper into the poverty trap. As prices go up, low-income households either look to borrow more money, or resort to buying low-quality food, avoiding heating their homes, or avoiding the purchase of adequate clothing. Moreover, there is also the danger that the middle classes will be forced to spend some of their savings on basic commodities and services, and in this way be pushed into poverty.

There is a strong moral imperative to avoid such suffering and hardship, compromising the next generation as prices spiral out of control. However, there is an equally powerful argument that prolonged high inflation threatens political and societal stability. In this scenario, the risk of political unrest and even violence does not derive necessarily from objective, absolute deprivation, but rather from what the American scholar Robert Ted Gurr, in his book “Why Men Rebel,” calls “relative deprivation.” What makes people take to the streets is not what they do or do not have, but the discrepancy between what they have and their expectations.

This is most prominent among the middle classes who in times of prosperity see their standard of living, their social mobility and their access to power increasing, but when economic conditions take a turn for the worse, they experience a greater change in their circumstances, even if their conditions are not as acute as those of the poor in society. And since they have the political acumen, they act politically to rectify things, either by pressuring governments through democratic channels, or if this doesn’t yield results, by other means, including violence.

Price increases are in many democracies a major reason for growing dissatisfaction with how democratic societies function, but are far from being the only one, as cumulative reasons for discontent inevitably lead to a yearning for political change. In a recent Pew survey across democratic countries, about two-thirds expressed their desire to completely reform their political system; however, this is also compounded by a widespread skepticism about the prospect of such changes materializing. These conditions make the perfect breeding ground for extreme views and political ideologies, not to mention populism, to take hold.

To prevent such authoritarian and populist tendencies becoming prominent in our societies, we must rethink our consumption habits, and establish a more equal distribution of wealth that ensures that all people can fulfil their potential, thereby enhancing the economy, improving society and averting political upheaval.

Yossi Mekelberg is professor of international relations and an associate fellow of the MENA Program at Chatham House. He is a regular contributor to the international written and electronic media. Twitter: @YMekelberg

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