COST-OF-LIVING CRISIS Ranked as the most severe global risk over the next two years by GRPS respondents, a global Cost-of-living crisis is already here, with inflationary pressures disproportionately hitting those that can least afford it. Even before the COVID-19 pandemic, the price of basic necessities – non-expendable items such as food and housing – was on the rise. Costs further increased in 2022, primarily due to continued disruptions in the flows of energy and food from Russia and Ukraine. To curb domestic prices, around 30 countries introduced restrictions, including export bans, in food and energy last year, further driving up global inflation.
Despite the latest extension, the looming threat of Russia pulling out of the Black Sea Grain Export Deal has also led to significant volatility in the price of essential commodities. Although global supply chains have partly adapted, with pressures significantly lower than the peak experienced in April last year, price shocks to core necessities have significantly outpaced general inflation over this time. The FAO Price Index hit the highest level since its inception in 1990 in March last year. Energy prices are estimated to remain 46% higher than average in 2023 relative to January 2022 projections. The relaxation of China’s COVID-19 policies could drive up energy and commodity prices further – and will test the resilience of global supply chains if policy changes remain unpredictable as infections soar. The cost-of-living crisis was broadly perceived by GRPS respondents to be a short-term risk, at peak severity within the next two years and easing off thereafter.
However, the persistence of a global cost-of-living crisis could result in a growing proportion of the most vulnerable parts of society being priced out of access to basic needs, fuelling unrest and political instability. Continued supply-chain disruptions could lead to sticky core inflation, particularly in food and energy. This could fuel further interest rate hikes, raising the risk of debt distress, a prolonged economic downturn and a vicious cycle for fiscal planning. Despite some improvements during the pandemic, household debt has been on the rise in certain economies.
Global mortgage rates have reached their highest level in more than a decade. Some estimates suggest that the increase in rates amounts to a 35% increase in mortgage payments for homeowners.6 Rent inflation has also followed suit – in the United States of America, it is estimated to peak at over 8% in May this year before easing, disproportionately affecting lower socioeconomic groups who are more likely to rent but least able to afford rental price hikes. Retirees will also be impacted as pensions fail to keep pace with higher inflation. Higher costs of food, energy and housing, causing lower real incomes, will result in trade-offs in essential spending, worsening health and wellbeing outcomes for communities.
Economic impacts are often cushioned by expansive fiscal policy and government programmes in countries that can afford them. Advanced economies continue to roll out measures, many of which have been broad-brush in approach – ranging from caps on electricity bills, fuel rebates and subsidized public transport tickets for consumers, to export controls on food, tax relief, enhanced state aid and support for affected companies. The resulting pressure on fiscal balances may exacerbate debt sustainability concerns, leaving emerging and developing countries with far less fiscal room to protect their populations in the future.