G

old surged past the $4,000 per ounce mark for the first time in history on Wednesday, extending its remarkable year-long rally as investors sought safety amid deepening global turmoil, renewed fears over government debt, and expectations of aggressive U.S. interest rate cuts.

Spot gold climbed 1.2% to $4,032.46 per ounce by 0653 GMT, while U.S. gold futures for December delivery rose 1.3% to $4,054.80. The milestone marks a dramatic ascent for the yellow metal, which has now gained more than 53% so far in 2025, making it one of the best-performing assets in global markets.

The record-breaking rally caps nearly two years of sustained momentum driven by geopolitical shocks, persistent inflation fears, and widespread skepticism over the stability of major economies.

A rush to safety amid global instability

Gold’s historic climb has been underpinned by what analysts describe as a “perfect storm” of market forces — ranging from central bank accumulation and falling real interest rates to political unrest and slowing growth in the United States, Europe, and Asia.

“Rising uncertainty levels tend to fuel gains in the gold price, and we are seeing that theme play out again,” said Tim Waterer, Chief Market Analyst at KCM Trade.
He added that the combination of a U.S. government shutdown, the prospect of lower Federal Reserve rates, and geopolitical instability have created ideal conditions for gold’s sustained rally.

The U.S. government entered its seventh day of shutdown on Tuesday, delaying the release of key economic indicators such as inflation and employment data. This has forced traders to rely on private and secondary reports to assess the economy’s health and gauge the Fed’s next move.

Investors are currently pricing in a 25-basis-point rate cut at the Federal Reserve’s upcoming policy meeting this month, followed by another quarter-point cut in December, according to futures data.

From 3,000 to 4,000: A year of record gains

Gold’s ascent above $4,000 marks the latest milestone in a relentless climb that began in early 2024, when the metal was trading below $2,600 per ounce. Since then, escalating wars, mounting sovereign debt, and a weakening U.S. dollar have driven investors to pour money into gold as both a store of value and a hedge against instability.

Traditionally seen as a safe haven during crises, gold has benefited from sustained demand from both institutional investors and central banks. According to the World Gold Council, central bank purchases of gold are on track to reach another annual record in 2025, led by China, Turkey, and India.

“There’s so much faith in this trade right now that the market will look for the next big round number — which is $5,000, especially if the Fed continues to lower rates,” said Tai Wong, an independent metals trader in New York.

He added, “There will be some bumps in the road, like a lasting truce in the Middle East or Ukraine, but the fundamental drivers — massive debt, reserve diversification, and a weaker dollar — are unlikely to change in the medium term.”

Rate cuts, debt fears, and ‘fear of missing out’

The gold rally is also being fueled by a psychological “fear of missing out” among investors, who are pouring into gold-backed exchange-traded funds (ETFs) and futures amid expectations of further monetary easing.

Major investment banks, including Goldman Sachs and UBS, have revised their gold price forecasts upwards, citing the likelihood of continued central bank buying and lower yields across global bond markets.

Gold’s spectacular rise has also been mirrored — though to a lesser extent — in other precious metals. Silver rose 1.6% to $48.57 per ounce, platinum gained 1.6% to $1,644.40, and palladium climbed 3.1% to $1,378.86, buoyed by the broader demand for tangible assets.

“The temptation to take profits around the $4,000 mark poses a potential short-term risk,” warned Waterer. “But the longer-term fundamentals remain bullish.”

Ever wondered why the prices of commodities keep rising? In the realm of commerce, the change of prices is a constant. However, when the prices of a multitude of goods and services rise collectively, a phenomenon known as inflation emerges.  If you feel like your money doesn’t stretch as far as it used to, that’s the erosion of currency value over time that we call inflation. But here is the twist – even when inflation is slowing down, prices aren’t necessarily falling; but rather, increasing at a slower pace.

Recent times have witnessed a noteworthy shift in economic discourse, marked by a renewed concern over inflation. After a prolonged period of perplexity surrounding persistently low inflation, the onset of the COVID-19 pandemic instigated a substantial departure, introducing an era characterized by stubbornly high inflation. This surge in prices is linked to various factors.

These factors for the inflationary trend can be interpreted along the lines of supply and demand. On the supply side, disruptions stemming from COVID-19, such as logistical challenges and workforce shortages, converged with spikes in energy and food prices induced by geopolitical events, notably the Russian invasion of Ukraine.

Simultaneously, on the demand side, substantial financial injections into households and enterprises by governments during the pandemic aimed at mitigating the impacts of lockdowns and layoffs resulted in an increased money supply, potentially contributing to the inflationary surge.

This economic shift, has exacerbated financial burden as a result of pivotal commodities experiencing substantial price increments—such as housing, energy, and food, particularly for those whose income has not kept pace with inflation. In many countries around the world, peaking inflation had threatened governments with social unrest, noteably in Sri Lanka ,Pakistan and numerous countries in Latin America, as well as protests in relatively high income countries like the U.K.

As inflation persists, in this month’s book bundle we examine books that demystify inflation, delve into unexplored trends, address common policy mishaps, and offer solutions to aid both policymakers and citizens to sustainably navigate these seemingly precarious times.

Inflation: What It Is, Why It’s Bad, and How to Fix It unravels the complexities of the most significant inflationary upheaval in over four decades, a phenomenon that has gripped headlines and left many grappling with the tangible impacts on their finances. Against the backdrop of the cost-of-living surge triggered by the COVID pandemic, the book sounds the alarm about the potential resurgence of a “Great Inflation,” with some observers expressing concerns of an even more ominous descent into hyperinflation that has historically devastated nations.

In response, the authors, Steve Forbes, Nathan Lewis, and Elizabeth Ames, engage readers in a captivating discussion that not only answers pressing questions but also charts a course for preparing for an uncertain future.

The authors draw on their expertise—Forbes as the chairman of Forbes Media, Lewis as an internationally recognized authority on money and taxation, and Ames as an accomplished author and journalist—to challenge prevailing misperceptions that have contributed to the current crisis.

They confront the widely held belief that central banks can spur prosperity by conjuring money “out of thin air” and debunk the notion that a certain level of economic “stability” necessitates “a little inflation.” These ideas, treated as sacrosanct in Washington for decades, are scrutinized in detail in Inflation exposing why they are flawed and how they have fueled the existing challenges.

The book critically examines the heedless money-printing and underscores the perilous path such policies could lead us down. Through a compelling blend of examples drawn from contemporary headlines and historical episodes, Inflation offers a real-world exploration of the subject, directly addressing the everyday concerns of individuals dealing with the tangible consequences of rising prices. Moreover, the authors provide practical steps that readers can take to protect their wealth.

Steve Forbes, Nathan Lewis, and Elizabeth Ames, Inflation: What It Is, Why It’s Bad, and How to Fix It (Encounter Books, 2022) ISBN: 9781641772433, 196 pages

In The Inflation Myth and the Wonderful World of Deflation, Mark Mobius embarks on a journey that might just prove everything we conventionally know about inflation wrong, presenting a thought-provoking narrative that questions the very foundations of our economic understanding.

In a world marked by rapid technological advancements, Mobius contends that our traditional metrics for measuring inflation are no longer adequate, urging readers to reconsider long-held beliefs about the economic phenomenon.

Mobius explorates of the shifting landscape of technological innovation driving the creation of cheaper and superior products. The heart of his argument lies in the assertion that these transformative changes are not accurately reflected in the ways we currently measure inflation. The book boldly contends that our contemporary understanding of inflation is nothing short of a myth.

One of the book’s standout features is its illumination of the political dimensions of inflation measurement. Mobius exposes the unsettling reality of governments manipulating and exploiting inflation figures to align with their economic agendas. He delves into the extreme challenges involved in gathering accurate data for inflation measurement, highlighting the inherent inaccuracies that result from these endeavors.

A crucial point of contention raised by Mobius is the fallacy of relying on currencies as a measure of inflation when these very currencies are continually being debased by the governments that issue them. This revelation challenges readers to reconsider the reliability of traditional economic indicators and prompts a deeper examination of the intricate relationship between currency devaluation and inflation.

Most significantly, Mobius underscores the impact of technological advancements and automation on the continuously falling costs of goods and services. The book articulates how these advances contribute to a deflationary trend, contrary to the prevailing narrative of perpetual inflation. Through compelling arguments and well-supported evidence, Mobius encourages readers to recognize the transformative power of technology in reshaping our economic landscape.

Mark Mobius, The Inflation Myth and the Wonderful World of Deflation (Wiley, 2020) ISBN: 978-1-119-74142-8, 256 Pages

Another important myth-busting source is We Need to Talk About Inflation: 14 Urgent Lessons from the Last 2,000 Years. In the book, economist Stephen D. King delivers a compelling exploration of the resurgence of inflation, exposing the desperate gullibility of central bankers, finance ministers, and the collective failure to learn from historical lessons. The book dismantles the widespread assumption that inflation was a relic of the past, revealing a new economic reality that threatens to exacerbate wealth inequality on a global scale.

In a world where investors, monetary authorities, governments, and policy makers had collectively believed inflation to be a thing of the past, King highlights the startling emergence of a poisonous economic reality. This new reality brings with it the ominous specter of increasing wealth inequality, forcing individuals worldwide to confront the profound implications of this unforeseen turn of events.

King, having been among the few to sound the alarm ahead of the latest inflationary upheaval, delves into the roots of the current situation. We Need to Talk About Inflation becomes a beacon, shedding light on the key lessons from history that policy makers either ignored or chose not to heed. From the days of ancient Rome through the American Civil War and up to the asset bubbles of today, King traces the common threads of inflation, attributing its resurgence to policy errors, sovereign greed, and a collective loss of faith in currencies.

The book stands as a sobering reminder that the economic challenges we face today are not unprecedented; they are deeply rooted in a historical continuum of bad judgment and misunderstanding. We Need to Talk About Inflation serves as a crucial intervention, cutting through centuries of oversight and misinformation to offer actionable insights that can be implemented now.

Stephen D. King, We Need to Talk About Inflation: 14 Urgent Lessons from the Last 2,000 Years (Yale University Press, 2023) ISBN: 9780300270471, 240 pages

Paul Mattick’s The Return of Inflation: Money and Capital in the 21st Century emerges as both a historical retrospective and a contemporary analysis, offering a profound examination of what is undeniably the defining economic concern of our time.

Mattick’s work delves into the surprise surge in price increases. Amidst the varying perspectives on the current economic landscape, there is unanimous agreement on one aspect: the imperative to curb inflation, even if the methods to achieve this goal are a subject of contention.

The Return of Inflation distinguishes itself by placing contemporary events within the broader context of capitalism’s history. Mattick skillfully entwines the past and the present, providing readers with a comprehensive understanding of the economic forces at play. An exploration into the nature of money serves as a foundational element of the book, offering readers a concise and jargon-free grasp of recent inflation trends and the strategies implemented to manage them.

What sets this book apart is its ability to demystify the complexities surrounding inflation. Mattick takes the reader on a journey through the historical antecedents of inflation, shedding light on the evolving dynamics of the economy. Through this lens, the book illuminates the state of our contemporary economic landscape, offering insights that bridge the gap between past and present.

Mattick’s insightful exploration provides a nuanced perspective on the current economic challenges and offers a valuable resource for those seeking clarity on the defining economic concern of our time.

Paul Mattick, The Return of Inflation: Money and Capital in the 21st Century (Reaktion Books, 2023) ISBN: 9781789147919, 184 pages

Rather than a “New Cold War,” we are now witnessing the culmination of an economic war with Russia, where the financial, energy, and capital markets are the battlegrounds. In his timely book, Economic War: Ukraine and the Global Conflict between Russia and the West, political risk analyst and consultant Maximilian Hess takes the reader through the period in which the seeds of economic warfare are sprouting into full bloom: from the initial invasion of Ukraine in 2014 to Russia’s full-scale invasion in 2022 and beyond.  

The book skillfully delves into various economic fronts around the world, demonstrating the weaponization of economic tools such as pipelines, mining, credit, and cryptocurrencies. Each chapter unfolds like a chess game between Russia and the West, allowing the reader to map the moves of the contestants both chronologically and regionally, including Russia’s response to Western sanctions and what is at stake for each party.

There were a number of disputes in the early and mid-2000s between Russia and Ukraine over gas supplies and the terms thereof that led Russia to cut off deliveries and precipitated gas supply crunches in the wider European market. What I think people forget is that Nordstream 2 and Nordstream 1 were never intended to increase the total amount of Russian gas that could be pumped to Central Europe.

Instead, they were designed to ensure that Russia didn’t have to do it through Eastern Europe, in particular through Ukraine, so that Russia could then increase the leverage of its gas policy over Ukraine. We should have understood this risk at the time of Nordstream 2, because it was essentially designed to give Russia the same kind of leverage over other Eastern European states that it had gained over Ukraine.

Q. Why do you think Putin choose to invade Ukraine specifically in February 2022?

I think he thought it was an important time economically, when the West was weak and divided. He hoped that the sanctions response and the economic response would be less intense than it might have been at another time. Thinking in terms of change in 2020 and 2021, the end of the Trump administration and then the Biden administration that follows made it clear that there would be a concerted sanctions strategy.

He hoped that European unity would be weak and insufficient to resist him. Inflationary pressures from COVID-19 had already increased, and Russia had already begun to cut off its gas supplies to Europe. At the same time, he was preparing his troops to invade Ukraine and saw it as a moment when the West would be relatively weak economically and relatively vulnerable. Therefore, less likely to act against him and less likely to act in support of Ukraine. Which, of course, turned out to be a very big strategic miscalculation on his part.

Q. Has Russia’s strategy of crippling Europe with gas cuts failed?

Largely, I think it has failed. Not because of any failure within the strategy itself but because of collaborative actions on the part of the West. Intelligence was shared by the United States, by officials who had spoken on the record and had reached the assessment that there was a small chance that Russia wouldn’t invade Ukraine in October 2021, simply the brutal nature of Russia’s onslaught in February, and the fact that the Europeans saw an army of the largest form that had taken this action in Europe since World War II, made it clear to many European leaders that they had no other choice.

Putin was preparing, and did prepare, for a scenario in which Europe was fully on board with the sanctions regime through Russia’s fortress balance sheet strategy, the Kremlin’s process of building up large reserves of ‘hard currencies’ and gold. But now that the initial pain of that gas strategy is being felt, and inflation has been at such high levels for a year and a half. There are obviously still many politicians, particularly in Europe, such as former French President Nicolas Sarkozy, who are calling for a softer approach to Russia on these issues. That’s why Putin’s strategy is not one that is over; by threatening more economic pain, he can also undermine support for Ukraine in the long term. Global gas markets are much more fragile, and we could still see a new spike in gas prices this winter as a result of the Kremlin’s actions.

Q. Did Putin pull out of the Black Sea grain deal in an attempt to revive the inflation weapon?

I believe very strongly that this is what he is trying to do. It also gives him the tool of offering grain to African countries to gain more support there. I think we should be prepared for more actions by the Kremlin to deliberately try to stir up inflationary pressures, possibly trying to find a way to drive up prices, as well. The Kremlin really has only one major option, which is to threaten an export embargo and actually take action to make it look credible. That option is difficult because Russia’s budget is now so skewed toward the military.

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glance at the history of the global economy reveals that certain critical junctures have been decisive for developing countries. And in keeping with the adage that history repeats itself, these critical junctures share some striking similarities: there are noticeable parallels between the historical period of 1971-1982 and today in terms of debt burden, which is a systemic challenge for developing countries and casts a shadow over their economic aspirations.

Let’s take a brief journey in history. In 1971, the U.S. left the Bretton Woods system, breaking the dollar’s link to gold. This bold move removed an important obstacle for the Fed, the U.S. central bank, enabling it to pursue a more inflationary monetary policy to finance the U.S. Treasury’s budget deficit.

After the collapse of the Bretton Woods system, money supply in the United States literally exploded. At the same time, the 1970s witnessed significant geopolitical upheavals, marked by the oil crisis caused by conflicts, wars, and political changes in the Middle East.

As oil-rich Middle Eastern nations restricted the flow of oil to the West, oil prices quadrupled in a short period of time. The surge in money supply and oil prices inevitably sparked inflation, which soared to double-digit levels. But, inflation was not the only problem as oil shortages also affected industrial production and transportation. Western countries faced both high inflation and sluggish economic activity—an economic stalemate known as stagflation.

The effects of stagflation reverberated throughout Western society and led to significant political changes. In 1979, Margaret Thatcher became the first female prime minister of the United Kingdom, while Ronald Reagan entered the White House shortly thereafter. These conservative leaders embraced bold economic policies based on neoliberal arguments. To tackle inflation head-on, they implemented fiscal austerity while giving central banks the green light to raise interest rates.

Up to this point, developing countries have not been major players in our story. However, that changed as global interest rates started to increase. In the 1970s, abundant liquidity and petrodollars provided developing countries with a promising opportunity to borrow. Particularly in Latin America, many countries took on significant debt burdens to finance their industrialization and development projects.

A significant portion of this debt was based on floating interest rates. In the 1970s, when liquidity was abundant and interest rates low, repaying this debt did not seem difficult. But things changed in the early 1980s and rising global interest rates made it harder to roll over debt.

The debt crisis that erupted in Mexico in 1982 spread first to Latin America and then to other developing countries around the world. Many countries turned to the IMF for help in overcoming their economic challenges, but the IMF’s support came with harsh conditions, namely the implementation of neoliberal policies that came to be known as the “Washington Consensus.” There was a sigh of relief for a while, but it did not last long.

As a result of the pandemic, supply chains experienced production bottlenecks, international transportation became more difficult, protectionist policies were put in place to discourage critical export items, and some countries stockpiled raw materials as a precaution. These events made the supply of intermediate goods very difficult and production costs began to rise. On top of all these developments came Russia’s invasion of Ukraine. With the outbreak of war, energy prices soared, fueling inflation.

The global economy faced the highest inflation in 40 years in 2022. Major central banks such as the Fed, the European Central Bank, and the Bank of England tightened monetary policy to fight inflation, and other central banks followed suit with global interest rates reaching 20–25-year highs. Debt repayment became a major headache due to, on the one hand, the increased need for borrowing due to the difficult economic conditions of the pandemic period and, on the other, the interest rate hikes due to post-pandemic inflation.

In the current global economic landscape, cumulative global debt exceeds an alarming $300 trillion, with developing countries accounting for a substantial share of about $100 trillion of this debt stock. Among the various components of this debt composition, it is evident that external debt is emerging as a prominent concern for developing countries.

The challenges posed by external debt arise not only from the escalation of interest rates, but also from the depreciation of local currencies, which exacerbates the complexity of debt repayment. External debt to gross national income ratio in low- and middle-income countries (excluding China) has increased from 25.6% in 2010 to 36.3% in 2021.

Rising global interest rates are making debt management more difficult, especially for poor countries. According to IMF calculations, eleven poor countries including Ghana, Mozambique, Sudan, Zambia, and Zimbabwe are in debt distress. Twenty-five countries, on the other hand, are in the high-risk debt category. It is important to underline that the aforementioned list does not encompass middle-income countries such as Sri Lanka and Lebanon, which grapple with significant debt burdens, as well as the prominent G20 member Argentina. Obviously, these countries also face formidable challenges in the debt rollover process.

The United Nations Conference on Trade and Development (UNCTAD) recently published a report with striking figures on the rising burden of interest and debt. The report exposed that 3.3 billion people live in countries that spend more on interest payments than on health or education. In the period 2019-2021, interest payments by developing countries will increase by 60.4% compared to the period 2010-2012. However, public spending on development-related areas such as health, investment, and education did not keep pace with interest payments. During this period, public spending on health, investment, and education increased by 54.7%, 41.1%, and 40.8%, respectively.

The money lost to interest payments shrinks public resources that could be channeled into development-friendly areas. As global liquidity tightens and interest rates rise, the gap in borrowing conditions between countries is widening. For example, countries in Africa can borrow on average at interest rates four times higher than the U.S. Borrowing costs in Latin America and the Caribbean are 2.5 times higher. Under these circumstances, it is very difficult for developing countries to catch up with advanced economies.

In a nutshell, the triangle of inflation, interest rates, and debt burdens shows that there are similarities between the 1971-1982 period and today. External shocks such as geopolitical tensions also reinforce this similarity. Inevitably, the question arises, “Could developing countries potentially face a debt crisis similar to that of the 1980s?”

As discussed above, there has been a discernible deterioration in debt burdens and debt rollovers in developing countries. However, it is important to note that the debt crisis is not all-encompassing. Although the debt ratios of major emerging economies such as China, Mexico, Brazil, Turkey, and South Africa have deteriorated, these countries are not experiencing significant difficulty in rolling over their debt despite rising interest rates.

Unlike in the 1980s, developing countries are more integrated into global trade, their economies are more diversified, and they have better macroeconomic governance. All these characteristics give emerging markets more foreign exchange earnings, flexibility, and experience in managing debt.

Nevertheless, there is little room for complacency. While upper middle-income countries may not face significant immediate challenges, it is clear in the current equation that debt has been increasingly becoming a vexing problem for low- and lower-middle-income countries.

As the cases of Sri Lanka and Lebanon illustrate, debt not only distorts key economic indicators but can also inflict significant social wounds. In addition, the growing fragility of the global economic and political landscape deserves due attention. Economic uncertainties and geopolitical risks remain high. Protectionist measures by developed countries are slowing the growth rate of global trade, which is vital for developing countries as it provides them with the foreign exchange inflows that are necessary for repaying their debt burdens.

Against this backdrop, developing countries need to be vigilant about their debt burdens, especially external debt. On the one hand, they need to embark on fiscal reforms to reduce their current debt ratios while, on the other, it is essential to accelerate the transition away from the debt-fueled growth model.

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he net minimum wage in Turkey will be raised to TRY 8,506 or USD 455 in today’s exchange rate. Gross minimum wage, on the other hand, will rise to USD 536 (corresponding to TRY 10,008). This is the highest minimum wage in the history of the modern Turkish Republic, both in Turkish lira and the U.S. dollars.

This wage floor surge also corresponds to a cumulative 100 percent increase in the past one year, as opposed to the year-end 65 percent expected inflation by the Turkish Central Bank. The new minimum wage is above the hunger threshold set by TÜRK-İŞ, the confederation of Turkish trade unions, and above the official market expectation of close to TRY 8,000.

Overall, with the current record rise of 55 percent, the minimum wage has gone up from TRY 184 in 2001 to TRY 8,506 (46 times the initial value) in the past 20-22 years. In U.S. dollar-denominated terms, the minimum wage is up by 430 percent.

Meanwhile, for a more realistic comparison, the U.S. dollar inflation and cross-country price differences should also be taken into account. Minimum wages in real dollar terms and USD Purchasing Power Parties (PPP ) are also provided in the figure above (Figure 1). They also confirm the rising PPP-based, real U.S. dollar terms of minimum wages in Turkey.

Asymmetric income flow

Even at its current all-time high, the minimum wage adjustment itself is clearly not sufficient to enhance the standards of living. Minimum wage to average or median wage ratios is over 70 percent nowadays, and they need to be decreased to the modern world averages of 40 to 50 percentage points.

Moreover, the ratio of laborers that are paid somewhere close to the minimum wage is around 38 percent in Turkey, or more than 7 million employees. This statistic needs to be decreased to somewhere close to 10 percent, closer to its modern western and OECD averages. That said, it is of course not the Turkish government to blame for these disruptive figures which are more related to the long-skewed dynamics of the Turkish economy and its real sector.

Another example of the skewed and distorted income equality in Turkey is the fact that in 2011, on average, wages and salaries were 21 percent of the total cost in the balance sheet of an average company. In the manufacturing sector that figure was down to 15 percent. In 2020, the year which saw the outbreak of the COVID-19 pandemic, the share was further down to 9 percent of total costs.

As of 2022, on the other hand, these figures are down to a few percentage points for some major businesses in Turkey. That is, indeed, part of the reason why the 2022 income flows are surging for companies in Turkey. As a result, profits and dividend expectations are also rising, which in return increases demand and prices of stocks.

For some major Turkish companies, before tax profits are up from 5-7 percentage points to 9-10 in the past five years. In some sectors in Turkey, 2022 profits are even up by 400 percent. Banking is just one recent popular example. While the share of wages and income for employees is hovering around 26 percent of national income, companies are enjoying somewhere close to 55 percent of the total national income.

The pandemic of 2020 was a breaking point for this figure, as just before 2020, the labor share was above 30 percent and company shares were below 50 percent of the national income. Right before the coup attempt in 2016, business shares were even down to almost 42 percent, while back then labor stood at almost 32 percent of the national income.

Does a higher minimum wage really work?

However, the true question is whether a higher minimum wage really works. There is, after all, a general public and theory-based academic perception that minimum wages don’t actually work, and that they could even lead to unemployment or inflation, as critics argue some companies won’t be able to pay those higher wages.

And, of course, then there are also these two popular neoclassical criticisms: that higher minimum wages will raise price levels and increase unemployment. So, is there any truth to these claims? Does the existence of a minimum wage really lead to unemployment? Or, should the market decide on wages and payments?

Theoretical and ad-hoc supply and demand analysis also shows potential negative impacts. This approach argues that the higher costs of production may force some companies (that are not able to increase their prices instantly) to lay off workers as in the case of other negative supply shocks such as an energy crisis.

However, there is an extensive literature based on empirical studies showing the opposite. As in the popular Sraffa, Reich, and Card and Krueger examples, literature provides empirical data from the U.S. and many European economies testifying to no negative impacts on employment by higher minimum wages.

The idea is that due to their flexible or monopsonistic nature, labor markets are rather complex. A reasonable minimum wage could even increase employment, for instance. Meanwhile, higher minimum wages could also decrease training costs by decreasing turnover rates.

Nowadays, consensus is rather about rising unemployment amongst low-skilled workers. Most of the empirical findings on negative impacts on unemployment are again related to low-skilled workers or the tradable sectors. Though, these workers could indeed be supported by supplementary programs such as a family support system or other unemployment reliefs.

Higher minimum wages could also increase cost-push inflation (PPI). At least in the short run, wage increases are likely to increase costs of production. Yet, regulatory measures could be used to limit even these price increases. Meanwhile, the TEM (Turkish Economy Model) is actually supporting businesses and mitigating these types of inflationary effects.

The demand-pull inflation may also be brought up, but it is still not that common in newly rising economies such as Turkey. The argument is that increasing purchasing power (following rising wages and salaries) and higher demand are additional factors that could lead to higher prices. Both these factors can lead to demand-pull inflation, especially in the advanced economies.

Another issue, at this point, is that in developing or newly rising economies such as Turkey, it is rather more difficult to assume that all the income increases will lead to instant demand explosions. Bequest or intergenerational transfer motives should also be taken into account.

These type of wage adjustments are surely needed in order to avoid the declining purchasing power, economic contraction, and the resulting potential negative impacts on labor markets and employment. Rising purchasing power and increasing demand, on the other hand, could even potentially lead to higher production and employment.

Policies such as a minimum wage limit would also help deal with race, gender, and ethnic-background related discrimination. As rightly pointed by Saez, Zucman and Piketty, among others, minimum wage debates are also directly related to the fight against these rising inequalities, fairness, and increasing labor income share in national income.

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o doubt, raising the minimum wage may provide relief to people in the short run. However, when they go shopping the next day, they may find out that everything has become pricier.

Most economists believe that there is at least some effect of increased wages on inflation, sometimes called wage-push inflation. This effect is more pronounced in a high inflation environment.

While the whole economy suffers from the unintended consequences of higher minimum wages, the more labor-intensive businesses like restaurants are more directly affected. These businesses are more reliant on human labor rather than machines. Higher wages mean higher costs of production, which translate into higher prices for ordinary customers.

Understandably, the wage-price spiral plunges the economy deeper into inflation, until further raises in minimum wages become meaningless.

High prices or unemployment?

Take Argentina, for example, where workers took out a mock funeral of minimum wages last month. The country’s average minimum wage is about $487, less than half the cost of basic groceries for a family of four, which is about $1,193. In other words, the minimum wage earner cannot support their family even for a month.

But with inflation for the current year in Argentina expected to reach about 95%, raising the minimum wage would perhaps just add more fuel to the fire. In fact, the prevailing inflation is at least partly a consequence of continuous upward revisions in minimum wage rates.

However, raising the minimum wage does not always directly result in higher prices—not every business can opt to pass on the costs to customers. Some businesses are forced to cut down the expenses instead. This means that if a factory has to double the wages per worker they may reduce the number of workers they hire, or perhaps even fire some, in order to maintain the overall cost of production. In other words, higher minimum wages can create unemployment.

Such pressures to absorb higher costs because of higher wages are especially conspicuous in the export sector. Export businesses face competition from around the world. But their competitors do not face the same increased costs of production. Wage laws vary from country to country. So, while the exporters in a high-minimum wage country incur higher costs, they don’t have the luxury to transfer it to their customers. Their customers are importers, shopping for the best deals they can get from around the world.

The middle class is left worse off

Another effect of wage-push inflation is that the middle class is left worse off. A mandated raise in minimum wage may force businesses to pay their workers more, but generally there are no similar laws for the white-collar workers.

The wages of the middle class are slow to catch up with these spells of minimum wage-led inflation. Not only that, unprotected by law, the middle class may not be fully compensated even in the longer run—their wages may not catch up with inflation at all. This means that a well-meaning government, trying to ease the lives of the working class can inadvertently permanently dent middle class incomes.

If the effects of minimum wage on the middle-class sound grim, consider those who are employed in the informal economy. They comprise the working class that works off the books, which comprises some 2 billion people in the world. Because these businesses are either too remote or completely underground and the government is not able to enforce laws, the minimum wage law does not effectively apply to them. In fact, avoiding such cost-raising regulation as the minimum wage is the major reason these businesses stay fully or partially underground.

The workers employed in the informal sectors, in turn, are the neediest ones, not protected by law, and most vulnerable to exploitation. As shown by Hohberg and Lay (2015) in a study of the Indonesian economy, these workers may be left worse off and may not get a raise in wages like workers in the formal sector. This means that minimum wage laws perhaps help the formal sector workers at the cost of informal sector workers, who are left worse off in the face of inflation

Governments should address the underlying causes of inflation

In any case, in times of high inflation, sweeping laws such as raising the minimum wage may at first glance lessen the pain of the working classes but inevitably also raise the cost of doing business and push governments into printing money. This means ushering in a period of even higher inflation, higher unemployment, a middle-class squeeze, and further marginalization of the poorest of the poor.

Arguably, taming inflation by attacking its fundamental causes could help the masses much more than increasing wages every few months. This would involve a policy mix to restore monetary value of the currency: reigning in government spending, application of brakes by the central bank, stabilizing the exchange rate, and even direct measures to freeze prices.

The minimum wage is not the enemy. Yet, sometimes wage hikes just become a habit, reflecting the policymakers’ reluctance to address the deeper, underlying causes of inflation. This is when a raise of the minimum wage virtually loses its ability even to help people’s welfare, which is its original raison d’être.

The world is burning, with literal fires, but also in the sense of overheating economies. That is, economies growing at a faster rate than their potential. How is that possible, you might wonder. It’s not. And therefore, excess growth translates into inflation.

Macroeconomists in the United States are divided into at least two camps. One camp favors slowing down the economy to bring inflation within manageable levels. They think persistent inflation is the bigger problem. The other camp opposes overreacting to inflation, as drastic measures to control inflation may hurt economic growth and throw the economy into recession.

The rest of the economists – mostly, non-macroeconomics folk – who are watching things from the fence, realize there’s a fire in the woods, i.e., inflation is becoming red-hot. Yet, even though they may not have a specific take on policy for tackling inflation, there’s a shared understanding among economists – macro and micro – that people running from this proverbial fire may just be overreacting. In other words, inflation is bad, but it’s not nearly as bad as the common person thinks.

Has the inflation problem been blown out of proportion?

According to Moody’s Analytics, consumers in the U.S. are estimated to be spending about $500 more a month than they used to a year earlier. House rents have gone up by roughly 25% on average. Almost half of the consumers in the United Kingdom are spending less on clothes and shoes, and feel financially worse off. And an increasing number of Germans have to rely on food banks.

Sri Lanka is literally burning, with actual instances of arson, as people protest against crushing inflation, which has accompanied a default on the country’s debt. But it is only one of the 12 countries that were covered by Reuters in a recent story, “The Big Default,” pointing to 11 other countries on the edge. Unmanageable levels of inflation are already shrinking fiscal space in poorer economies as governments try to help people get out of the quagmire. And ironically, policies, with which governments are trying to help people, are again sometimes bringing in more inflation.

Yet an economist may light a cigar and tell you to relax. It’s not perhaps as bad as it seems: inflation does not hurt your purchasing power. If there’s 10% inflation, you will get some increase in income too – say, as a taxi driver you’d charge more; if you’re a programmer, your company will give you a salary raise, and so on. You are getting compensated, but perhaps don’t realize it. You’re probably falling for the “inflation fallacy”: the mistaken belief that inflation erodes your purchasing power.

Only an oil production company may benefit from higher oil prices. But the takeaway here is that inflation affects different sectors of the economy differently and most are hurt when inflation is unexpected and high.

Moreover, people at different income levels get hit by inflation differently. Easterly and Fischer (2001) found that high inflation hurts the poor more than the rich, and the slice of the poor in the national income pie shrinks. This is because the poor spend a bigger percentage of their income on essentials, like food and energy (think about the irreplaceable need to cook food!). When essentials become pricier, as is happening now, the poor become poorer, and even the lower-middle class isn’t spared. Understandably, lower-income Eurozone consumers are feeling the inequality increase in the current crisis.

According to an estimate by Mahler et al. (2022), an additional 75 to 95 million people in the world could slip into poverty, due to the pandemic, war, and inflation. Even being from a particular race may expose you to higher inflation – owing to greater dependence on specific goods – highlighted in one of the presentations at the “Unequal Inflation Impacts” conference, hosted by the Federal Reserve Bank of Minneapolis.

Currently, in many economies, including Australia, the United Kingdom, the United States, the Eurozone, and Japan, real wages are falling. The data shows inflation to be rising at a higher rate than wages, causing a fall in the common person’s purchasing power. No wonder, many grocery stores in the U.S. have closed as a result of falling demand and the rise of online buying – because of changing trends after the COVID19 pandemic, but also the swelling cost of living.

Actually, when macroeconomists contend that inflation does not affect one’s purchasing power, they are focused on smooth, expected, and low monetary inflation.

The current inflation crisis springs from supply-side shocks – less energy and food supplies – due to the unexpected war in Ukraine, and a spike in aggregate demand due to quick post-COVID19 recovery in many countries. Therefore, there is no reason to expect the purchasing power not to fall.

Even otherwise, one must be careful when particularizing from generalizations in social sciences. Economics, for its part, is focused on summed up, average effects, which may be boiled down into condensed policy guidance. That is helpful by itself.

But such advice is not necessarily in sync with the reality experienced by a particular data point, at a specific point of time – that is, what you or I may be going through right now. To borrow a quip from Jeffrey Sachs, “A man whose feet are in the fire and whose head is on ice is asked, ‘How’s the temperature?’ and he replies, ‘On average just fine.’”

Panama has been facing ongoing protests in the past few weeks. Protestors took to the streets due to the rising inflation and corruption that has led the country into a total turmoil. 

Union representatives, student groups, workers, teachers, doctors, and thousands of people from different sectors across the country demand a solution to high fuel prices and rising living costs. 

While protesters set up roadblocks in Santiago de Veraguas and other cities, especially in the capital Panama, security forces intervened using tear gas and water cannons. 

Protests turned violent in Santiago de Veraguas, where tensions rose. The demonstrators set a seized police vehicle on fire.

Recent demonstrations started on July 18 in Panama as on July 17 protest groups rejected a deal with the government to cease the protest in exchange for a reduction in fuel prices. 

On July 18, President Laurentino Cortizo declared measures to decrease fuel costs and put a cap on the price of essential food items, but protesters said these were not enough.

 On Monday, Luis Sanchez, a leader of the Anadepo alliance of civic groups, stated that the group decided to continue the protests after union leaders consulted grassroots supporters on the deal announced on July 17. He told TVN-2 channel, “We had warned the executive that we still have to consult the rank and file.”

 He added that the “deal was signed under pressure.”

 “In the meantime, there is no agreement,” added Sanchez as he ripped up a sheet of paper.

New measures

President Cortizo announced plans to cap the prices of 10 essential goods and reduce fuel prices.

During a speech on television, Cortizo attributed the economic crisis to issues related to the outbreak of COVID19 pandemic and the Russia-Ukraine war.

His explanation was rejected by opponents, who emphasized incompetence and corruption inside the government.

“One of the problems now hitting Panamanians and the world is rising fuel prices and the consequences. For that reason, I set up talks to address high fuel costs directly impacting the cost of staple foods, with the objective of finding concrete and feasible solutions,” he said. 

Negotiations on Tuesday failed to break the gridlock. 

 Another problem for Panamanians is the inequality created after the pandemic. The economy had a growth rate of 6.5 percent, but many Panamanians feel they are not participating in this growth.

Guillermo Ruiz, a political analyst, told Al Jazeera that the growth is seen only in a few sectors such as logistics, the national airline, mining, and the Panama Canal. He added that working-class Panamanians are wondering why they are unable to pay for gasoline if the country’s economy is growing.

Lack of essential goods

 Government officials and some protest leaders announced a deal to end more than two weeks of protests over high fuel prices and increasing living costs on July 17.

 The protests have damaged Panama’s economy seriously as protestors blocked many critical highways. There were also goods blockades, including the Pan-American Highway that connects Panama with the rest of Central America and is the main transport route for goods.

Angelica Ruiz, a resident of Pacora, east of Panama City, said, “We are in a bad situation; no food, no buses. I wanted to buy rice and … what little can be found is very expensive. The vegetables are damaged.”

The measures are not enough

 The government decided on July 17 to cut the price of petrol to $3.25 per gallon and pursue talks on lowering food and medicine prices, which were vital concerns for the demonstrators.

Last week, the government had already lowered the petrol from $5.20 per gallon in June to $3.95, but this was not enough to calm the demonstrators.

After the July 17’s statement by the Panama government, several unions said the so-called deal was ineffective and had left out many classes.

Protester Juan Morales, a farmer from Capira, west of Panama City, told the AFP that the protests will not be weaken and that protestors need solid answers from the government.

Bitter recipe for the economic situation

 The country of 4.4 million is going through rough economic conditions. An inflation rate of 4.2 percent was recorded in May, with an unemployment rate of about 10 percent and a fuel price boost of nearly 50 percent since January. 

 In 2021, the inflation rate in Panama was only around 1.63%. 

 Inflation has become a significant problem for almost all countries. Especially in Sri Lanka, Ghana, Ethiopia, Kenya, Nigeria, and Pakistan, there is civil unrest resulting from the economic hardship.

 The first apparent example was Sri Lanka. In April, major protests started in the country and spread soon thereafter. Inflation in the country quintupled, making it the highest since the country’s independence in 1948. As the country is struggling to find a solution for the high inflation, protestors seized the Presidential Palace on July 10. Sri Lankan President Mahinda Rajapaksa resigned after fleeing to Singapore.

 Will Panama face a similar destiny to Sri Lanka? Only time can tell.

With the Ukrainian ports blocked for three months, the “bread wars” began in Africa. States whose food supply security depends on imports are nowadays facing similar situations even more so as they face the worst food crisis in living memory. Many of them predictably hope Russian President Vladimir Putin will soon reach an agreement with Ukraine to stop the war and prevent the food crisis.

The Russian leader is accused of blocking exits from major Ukrainian ports since the beginning of the war and has been asked by the West to remove barriers hindering access to ports in order to resume the export of Ukrainian grain to the rest of the world. Approximately 15 million tons of grain are reportedly blocked in the ports of Ukraine, which currently accounts for nearly 10 percent of the world’s wheat trade. The war has interrupted international shipment of wheat, causing acute famines and increasing prices globally.

According to the report by the World Food Program released in early June 2022, the ongoing Russia-Ukraine war has forced more than 20 million people in Africa to suffer acute food shortages. With the start of the war, the situation worsened when, the Port of Odessa, the main port for agricultural exports, was blocked by Russian troops. The report warns that if emergency aid is not provided to several countries in Africa, the region will enter a further stage of famine. While the number of people suffering from hunger has quadrupled in the last two years in Kenya, more than 700,000 people in Ethiopia need urgent food aid every day.

Recent developments

Before the outbreak of the Russia-Ukraine war, the food supply security crisis was eminently in the making due to climate change and the COVID19 pandemic. Now, the grain crisis and states’ protectionist self-sufficiency policies rub salt into the wound.

Ukraine’s wheat export is interrupted by Russia. China, which has 51 percent of the world’s wheat stock, increased its own stocks by 20 percent. The world production of wheat increased  by 8 percent (from 732 to 790 million tons) in the last four years but, at the same time, stopped its wheat export.

The picture is not entirely that grim. The outlook for global food supply remains positive. But the food prices have risen sharply due to higher shipping costs and trade cuts because of the war, as well as the rising import of inputs such as fertilizer prices and thus import bills. This affects the world’s poorest countries and developing countries the most.

Food prices have been high before, and the war is driving food prices even higher. The most affected commodities are wheat, corn, edible oils, and fertilizers. Global commodity markets face upside risks from reduced grain supply, higher energy prices, higher fertilizer prices, and disruption to trade due to the closure of major seaports such as Pivdennyi, Odessa, Mykolaiv, and Chornomorsk, which account for about 80% of the total throughput of Ukrainian seaports.

After the start of the Russia-Ukraine war, trade interventions by countries increased. From January to early June 2022, 268 policy measures were announced and implemented by 75 countries. The number of policies regarding food and fertilizers stood at 85 percent of trade interventions, while the percentage of policies regarding raw materials and fuels stood at 15 percent.

Globally, hunger levels continue to rise at an alarming rate, with close to 193 million people reportedly having experienced severe food insecurity in 2021. According to the Global Report on Food Crises, it is predicted that by the end of 2022, all figures will be exceeded, and approximately 40 million more people will suffer from food insecurity compared to 2020. Surveys recently conducted in 83 countries to detect the effects of the recent food crises show that a significant number of people run out of food or already reduced their consumption in the first two years of the COVID19 outbreak.

Russian position

Russia and the West play a blame game over the export of Ukrainian grain. Putin announced that Russia does not prevent grain exports from Ukraine claiming that those exports can be made through ports on the Black Sea and neighboring countries, putting the blame on the West, which claims that Russia blocks exports from Ukraine.

Putin noted that there are several ways to export grain to the Danube River and then Romania, Hungary, and Poland via the Ukrainian-controlled ports of Berdyansk and Mariupol. He also called for “clearing” the waters of mines around the ports held by Ukraine, saying that the ports under the control of Kiev, especially Odessa, could also be used. However, he added that the simplest, easiest, and cheapest way to transport agricultural and food products to the Baltic ports is by exporting them through Belarus and from there to any part of the world. But, he added, exports via Belarus would be conditional on the West “lifting sanctions” against Minsk.

As the Russia-Ukraine war entered its fourth month, Ukrainian officials accused Russia of obstructing exports, claiming that Putin’s forces had already stolen 500,000 tons of grain. Alerted by possible food shortages, several Western countries urged Moscow to stop its military offensive.

On the other hand, UN Secretary-General’s spokesperson Stéphane Dujarric said that he is trying to reach a “package deal” to restart Ukraine’s food exports and Russia’s food and fertilizer exports, adding that the situation is volatile. Dujarric also said that with the Secretary General and UN staff, they will go wherever is needed to finalize this project.

United States’ position

The U.S. ambassador to the United Nations said the Biden administration supports Russian grain and fertilizer shipments to address growing global food insecurity caused by the war in Ukraine. He said there were no U.S. sanctions on Russia’s grain and fertilizer shipments, but that companies were backing down because they were “a little nervous.”

It has been stated that the United States is ready to issue “letters of relief” to grain and fertilizer exporters and insurance companies to get much-needed agricultural products out of Russia. The U.S. supports the UN’s efforts to allow grain exports from Ukraine by train and via the Black Sea, as well as to ensure the unrestricted access of Russian food and fertilizers to global markets.

Turkey’s role in opening ports

Around 30 percent of the wheat traded across the world is produced in Russia and Ukraine. Dozens of container ships are stranded in Ukrainian ports, surrounded by Russian forces and protected by mines, preventing the transfer of wheat, sunflower oil, and other goods, as well as agricultural fertilizers.

President Putin reiterated to President Erdoğan that the Kremlin would support “unhindered” exports of Ukrainian grain from ports, but demanded the lifting of the Western embargo on Moscow in return. The meeting between the Turkish and Russian leaders reveals that Russia is ready to export large amounts of fertilizers and agricultural products if the Western sanctions are lifted.

A microbe, causing political instability, inflation, and even insurrections around the world seems somewhat of a stretch—more like a sci-fi thriller plot, than reality. If it only were the case!

For one, disease outbreaks may worsen pre-existing tensions within a society, as happened in the second cholera pandemic in France. The poor suspected the elite of poisoning them while the rich accused the poor neighborhoods of being the breeding grounds for the infection. The subsequent insurrection, known as the Paris Uprising of 1832, wounded or killed about 800 people.

Civil unrest spread to other countries, including England, Ireland, and Prussia, and in Russia, the disturbances came to be known as the Cholera Riots. Indeed, social scientists have noted that disease, unrest, and war, co-occur in a pattern.

Alarmingly, the makings of similar crises are all present now. Rising prices, food shortages, and famines, in the present day, do not just happen on far-off islands of poverty, leaving the powerful unscathed. They are already bringing down governments and becoming a political force to be reckoned with. Here’s how it all connects.

The war in Ukraine and the global food crisis

Food prices saw a rise due to the pandemic on account of logistical disruptions affecting supply and a sharp economic recovery that increased demand, themes I covered in an earlier article. But the lion’s share of the current food inflation is a direct consequence of the Russian invasion of Ukraine. War has meant more problems for farmers. Ukraine is unable to export grains on account of the blockade, and prices of some inputs like fertilizers, of which Ukraine and Russia are major exporters, are rising.

This is a war between the geographically largest country in Europe (Ukraine) and the geographically largest country in the world (Russia), and given the abundance of fertile land, especially the area’s amazingly productive “black earth,” these two giants are among the world’s top grain exporters.

As supply is disrupted, wheat, corn, and edible oil prices are rising. Already, global food prices are 57 percent higher now than a year earlier.

This is especially concerning for the extremely poor, i.e., those living on $1.90 a day or less. Food expenditure takes up approximately two-thirds of their income. This means, even in normal times, they’re able to spend only $1.25 on food a day. Soaring food prices pose a tough choice for the poor: eat food of less than $1.25 cost or reduce consumption of other necessities like medicine to below 63 cents.

Sensing trouble, India had banned wheat exports, while Indonesia had stopped all exports of palm oil. The policy attracted criticism abroad as international prices surged while causing uproar by farmers at home, as domestic prices plummeted. Faced with criticism, both countries have eased the restrictions, but the episode shows how panic about food security in a country can spontaneously trigger an international crisis, especially endangering the food-importing countries.

Riots, violent protests, and the rising challenge for governments

Already, people are getting increasingly frustrated and governments around the world are having to take the heat.

In Sri Lanka, Prime Minister Mahinda Rajapaksa had to resign, after violent protests against inflation. Unsustainable dollar-denominated debt, worsened by the free fall of the tourism-dependent Sri Lankan rupee, left the government, which has now defaulted, in a tight spot.

Food inflation in Sri Lanka reached 57.4 percent in May and may worsen with a further fall of the rupee, which has already depreciated by a staggering 80 percent since March. The spokesperson for the UN humanitarian agency Office for the Coordination of Humanitarian Affairs (OCHA) warned of Sri Lanka being on the verge of a “full-blown humanitarian emergency,” as it faces severe shortages of food, fuel, and medicine. The government is now trying a 4-day work week to help manage fuel and food shortages, by encouraging people to stay home and “engage in agricultural activities.”

Meanwhile, Pakistan has seen the fall of the popular government of Imran Khan, which despite handling the pandemic rather well, couldn’t really get a handle on inflation. Allies in Khan’s coalition government, sensing the pulse of the public—some say, of the powerful military—jumped ship.

Yet, the new Shahbaz Sharif-led coalition government, which led “End Inflation March” weeks before coming to power, is having a tough time finding its feet. The rupee depreciated by more than 13 percent in about two months and the inflation trajectory has considerably worsened since the new government took charge. In an effort to resume the stalled IMF program, the petrol price has risen by 56 percent and high speed diesel by a whopping 83 percent in just 20 days.

Peru, meanwhile, saw violent protests against inflation in which at least six people died demanding President Castillo’s resignation. Argentina, where inflation reached 58% in April 2022, is similarly seeing protests. The IMF has warned that Latin American countries could face social unrest if immediate measures to help the poor are not taken.

Even relatively stable, high-income countries, with many more resources to tackle inflation at their disposal, have seen growing dissent. The approval rating for Joe Biden in the U.S. has been continuously falling, as gasoline prices have crossed $5 per gallon in a historic first. In the UK, Boris Johnson survived the vote-of-no-confidence recently, but his popularity has seen a sharp decline. Meanwhile, in Australia, Scott Morrison lost elections to Anthony Albanese, in a contest where the economy and inflation featured prominently.

Leaders need to act now, any government could be next

The economic squeeze faced by people as a result of the pandemic is getting worse by the day due to the added effects of the Russian war. Some accuse Russia of using war-inflicted inflation and the threat of hunger as a bargaining chip. Russia, on the other hand, blames the Ukrainian mines in the defending country’s ports, and an array of sanctions on Russia that have increased the costs of trade and are responsible for inflation.

Whatever the actual share of responsibility for the crisis is between Ukraine and Russia, what’s clear is that soaring living costs are threatening livelihoods, as men of power struggle to sort their egos out.

This war needs to end. But until that happens, governments urgently need to introduce policies to protect the vulnerable. If the wounds of the hapless are allowed to simmer, the resulting chaos will bring more than just the poor down, if history is any guide. Time is running out.

As of mid-2022, the price of money and the cost of borrowing are increasing again in many advanced economies. Decades of ultra-loose monetary policy and cheap (close to zero or even negative cost) money has come to a new end. The United States, the UK, Canada (even Australia and New Zealand), and to a limited extent the Eurozone, are increasing interest rates.

For example, the Fed and BoE (Bank of England) are fast increasing their benchmark rates. The Fed first increased its key interest rate by 25 bps in March 2022, then embarked on a 50 bps increase in May. Finally, in June 2022, there was another 75 bps raise (to the 1.50-1.75 percent range). This 75 bps hike was, meanwhile, the Fed’s highest rate rise in the past 28 years (since 1994). The BOE on the other hand, have so far raised rates during the past four meetings (policy rate rose to 1 percent). The ECB (European Central Bank) is taking a rather moderate approach. They are expected to raise the policy rate in July (by a quarter percent), the first rise since 2011.

Global rate gaps have also been rising lately, both between the advanced economies (AEs) and developing economies (DEs), and also amongst the AEs. From neutral to negative and to the substantially positive rate rises, global rate paths are diverging. Markets are, in a way, swinging between the tightening cycle in the West and the loosening cycle in the East.

The Euro area and the UK are more exposed to the recent energy crisis and the war in Ukraine. Diverse economic dynamics and differing policy approaches among the ECB members also make the decisions and policy approaches rather more colorful in Europe. (Fig. 1) So, the tightening cycle is expected to be more moderate compared to that in the U.S.

It should meanwhile be underlined that strong national currencies (in the AEs) are mainly used to fight high inflation and keep prices stable. In that sense, the focus of central banks in the AEs is primarily over nominal factors, predominantly focusing on bringing down the inflation rate. On the other hand, central banks in most DEs and even Japan focus on real targets such as encouraging growth and increasing employment.

Meanwhile, Japan, China, Russia, and Turkey are keeping their easing stance. For example, in China, recent restrictions and lockdowns as well as the weak property market activity have all led to interest rate declines (a recent 10 bps decline to 3.7 percent). Banks are encouraged to lower borrowing rates. Mortgage rates in China were also recently cut by the highest rate on record.

Under normal circumstances, a strong USD would be expected to positively affect the developing economies and their exports. However, in particular, the rapid surge in value of the USD has also potential huge risks for the global economy. In the meantime, the U.S. inflation has also resumed a new acceleration trend in May.

Inflationary effects of weak national currencies should be noted first. Imported good and service prices, energy and commodity prices would all push the prices up in countries where national currencies depreciate. Therefore, cost of living will surely go up in the rest of the world. For example, Japan’s ultra-loose monetary policy and weak yen are expected to increase inflation expectations.

In addition to the rising dollar price, increasing energy, food, and fertilizer prices would also mean higher import bills and higher cost of production. Hence a higher producer inflation.

Capital is also likely to flow into tightening economies such as the U.S. and its financial markets. That means capital outflow from the developing economies. Therefore, financial stability is likely to be negatively impacted by the capital flight from the DEs. Increasing financial volatility would mean higher exchange rate volatilities and amplified current account deficits.

Investments and capital inflows into emerging markets (EMs) will also fall. The risk of investments into EMs would be rising. More specifically, developing countries already struggling may face further financial difficulties looking forward.

In today’s ever-integrated global economy, huge financial capital flows also lead to monetary policy transmissions into the other developing economies. For instance, many Latin American economies, including Brazil and Mexico, have already started a tightening cycle in 2021.

Emerging economies with huge debt denominated in US dollars are also likely to be negatively impacted. Both sovereign and corporate dollar-denominated debt is at enormous sizes today. Real debt burden, in particular, foreign currency-denominated debt burden will increase. Hence, cost of borrowing and financial instability will both rise again.

Cost of external finances, that is the credit default swap (CDS) and risk premiums paid will be higher for the DEs. A strong U.S. dollar (and capital inflow into the U.S. markets) makes access to financial capital much more difficult and more expensive for individuals and businesses outside the U.S. Global financial conditions, and access to credit markets will tighten.

A strong U.S. dollar may also bring up debates regarding reverse currency wars, as the U.S. dollar appreciates along with aggressive rate rises. After all, the post-Great Recession and post-2020 pandemic quantitative easing (QE) policies of the AEs brought forth a new currency war argument.

Another critical issue is that the world, including the AEs, should be careful not to fall into another round of recession while dealing with the global inflation. After all, nowadays, there is a huge concern that the Fed’s hawkish stance might mitigate economic growth, and even lead to economic decline and stock market crashes.

Meanwhile, it is still not clear whether this new strong USD trend will lead to another round of trade war, due to increasing U.S. trade deficits.

Greater borrowing cost divergence even within the Western economies is another potential issue. While the Fed is even expected to take a “restrictive” stance if inflation proves stickier, the European Central Bank may have to hit the brakes if sovereign borrowing spreads seem to widen.

The year 1996 saw the publication of Roger Bootle’s provocatively titled book The Death of Inflation, which argued that inflation was no more the threat it used to be and fixation with keeping prices low can hamper growth unnecessarily. The book is a compelling read. Yet, the challenges brought about by the pandemic may be in conflict with the optimism in it, as reflected in Bootle’s own columns and interview.

COVID19 did not just catch the global health infrastructure off guard, but wreaked havoc on the world economy as well, particularly in terms of ushering in an era of intractable inflation. Here’s a look at how the infection jumped from person to person, eventually subduing the economy, and throwing demand and supply into a nagging imbalance.

The demand side: The virus and the price of your groceries

Faced with sudden outbreaks, panicking governments the world over were left with no choice but to swallow the bitter pill of lockdowns. It was clear that there was no alternative, at least in the short run. The policy helped control the contagion, but not without business closures and job losses. This, in turn, raised a natural question: how to help the common person muddle through the crisis with the economy at a standstill?

Almost all economists favored economic stimulus—financial help from the government channelled through the fiscal and/or monetary policies—but answers to how, how much, when, and where varied drastically.

Most governments around the world offered one kind of stimulus or another. Yet some countries with the highest stimuli—say, Canada, Germany, Spain, or the United Kingdom—are now experiencing record inflation.

Inflation in the United States, the country with perhaps the largest stimulus packages, has hit a 40-year high, with prices this March being 8.5% higher than March last year. This has meant the average household having to spend nearly $327 more per month than they used to, a year ago.

One of the reasons the oil price fell is that oil supply is relatively “inelastic” in the short run. That is to say, oil companies cannot cut down on oil production suddenly. These are giant enterprises with fixed, long-term costs. As demand vanished due to the virus—and supply could not suddenly be scaled back immediately—oil flushed markets, and oil price fell drastically.

This should have made everything cheaper. But as economies recovered, often with a sharp, V-shaped recovery, thanks to the vaccines, the demand for oil rebounded phenomenally. So much so that even though the world economy still has not fully recovered from the pandemic, oil demand may have already surpassed its pre-pandemic levels.

The resurgence in oil demand—with limited supply available—made the prices skyrocket, from a record low of minus $40 per barrel at the start of the pandemic to around $120 per barrel now.

Yet of course, this rise is not without the added conundrum of Putin’s war on Ukraine. Supply disruptions due to the war, with the added effect of sanctions, and now an embargo, have worsened the spike in energy, both oil and gas, prices, given the fact that Russia is among the top three producers of crude oil, and the second largest producer of natural gas in the world.

In addition, uncertainty brought by the war has affected investment and financial markets the world over. Stock markets have been bearish. Businesses are having to look for alternative trading partners. These factors, along with higher oil prices, are making costs of businesses soar, leading to “cost-push inflation”—higher prices arising from higher costs of production.

The outlook is not good as yet, and the distressed need help

Together, resurgence in demand after quick initial recovery, and a fall in global supply due to higher costs of production, have translated into an indomitable surge in prices the world over. Turkey has seen prices rise by 70% between April 2022 and April last year.

The corresponding figure for Argentina stands at 58%, and for Venezuela, Sudan, and Lebanon, at over 200%. While inflation in these countries may not be attributable exclusively to the above stated factors, as these economies were already stuck in macroeconomic blues—sometimes trying their luck with unorthodox policies—the pandemic and war have complicated things considerably. Even in advanced economies, the IMF estimates a 38-year high record inflation for the current year.

Average incomes, in turn, will grow only modestly this year, as reflected in the world GDP forecasts being revised over and over again. While growth in the oil-exporting Gulf economies forms an exception, as they are benefiting from higher energy prices, even those will not be immune to food inflation, considering 85% of their food comes from imports.

But the outlook for the developing economies is particularly concerning. They are facing capital flight as investors opt for higher return in the advanced economies, where interest rates are rising, pushing the indebted countries closer to default. This will further pressure stressed currencies, worsening inflation, with more countries having to knock the IMF’s door, sooner or later. Calls for international financial institutions to take a more helpful role to help the distressed countries are, understandably, increasing.

Likewise, devising a careful policy at the national level may be crucial to people’s livelihoods. It may be argued that governments need to prioritize fighting inflation over showcasing economic growth. A blind pursuit of growth would lead to higher demand and translate almost inevitably into more inflation.

As for the micro level of managing a household, it may be just prudent to adapt our spending patterns to the disheartening reality of deep-seated inflation, and perhaps spare a few bucks to help those in distress. Inflation isn’t dead, as yet. But the world needs a healing touch, now perhaps, more than ever.

An “emerging market (EM) economy” is the economy of a developing country that is becoming more engaged with global markets as it grows. Countries named as EM economies are those with some of the characteristics of a developed market. EMs have the features of increased liquidity in equity markets, increased trade and foreign direct investment, and modern financial institutions. About 20 countries are classified as emerging economies although there are differences among them.

EM countries include Argentina, Brazil, Bulgaria, Chile, China, Colombia, Croatia, the Czech Republic, Hungary, India, Indonesia, Latvia, and Lithuania, Malaysia, Mexico, Peru, the Philippines, Poland, Romania, Russia, South Africa, South Korea, Taiwan, Thailand, Turkey, and Ukraine.

Inflation is the rate at which the general level of prices for goods and services is rising. The Keynesian school believes that inflation results from economic pressures such as rising costs of production or increases in aggregate demand. In cost-push inflation, production costs rise on an economy-wide level because of mainly increases in input prices, and this can lead to increased consumer prices throughout the whole economy, as producers pass on their increased costs to consumers.

Demand-pull inflation occurs when aggregate demand exceeds aggregate supply, and thus prices increase economy-wide. Built-in inflation is a type of inflation that results from past events and persists at the present. It then becomes a normal aspect of the economy, via inflationary expectations and the price/wage spiral. According to the monetarist view, the expansion of the money supply is the principal cause of inflation. Economists from these schools disagree on the root causes of inflation, although they underscore the fact that inflation is a far more complex phenomenon.

The ratio of food expenditure in all consumer spending is higher in EMs compared to developed economies. This ratio, for example, is about 26% in Turkey and 13% in the U.S., which are EM and developed economies respectively. Food inflation occurs when the food consumer price index (CPI) exceeds headline CPI. For example, in September 2021, the yearly increase in Turkey’s food CPI was 28.8% while the increase in headline CPI was 19.6%. Food inflation exists in almost all EMs, and thus increases headline inflation.

What does inflation look like in EMs?

Consumer prices are increasing in both developed and EM economies. The International Monetary Fund (IMF) expects inflation will accelerate to 2.4% in 2021 from 0.7% in 2020 in developed countries and to 5.4% from 5.1% in EMs. Rising food and energy prices, pandemic-related supply chain disruptions, and surging shipping costs are among the determinants. In recent years, inflation has been very low in rich countries while it has been high in poorer countries. Basic necessities such as food and energy typically account for a bigger part of household spending, so current developments can lead to hardships for people.

The increase was modest and prudent, raising rates from 0.1% to 0.5%. Central banks have less breathing room to wait and see whether price rises and supply bottlenecks are temporary. The Polish rate was 5.8% in September 2021 which is the highest in 20 years. It is closer to double figures in Brazil and Mexico, where in September the core inflation rate accelerated to the fastest rate since 2017. These higher rates of inflation are partly because food accounts for a larger proportion of consumption.

Several local factors affect food inflation, and the causes of higher prices have not been homogenous across EM economies. Inflation in items like fruit and vegetables in particular seems to vary across markets, due to local factors and the climatic conditions for such products. In its April 2021 report, the IMF estimated that the annual pass-through from international food prices to the domestic food CPI was much higher for middle- and low-income countries than for high-income countries.

This means that the impact on headline inflation is higher in EMs since food has a larger share in CPI baskets. Food items in the U.S., the Euro zone, and Turkey are about 13%, 17%, and 26% of CPI baskets respectively. This is particularly true for countries such as Turkey, Brazil, Russia, and countries in Central and Eastern Europe, the Middle East, and Africa where food inflation remains significantly above headline inflation.

Economic and political impact of inflation in EMs

Inflation is a kind of tax on the poor. This is possibly why central banks in EMs are acting against the price pressures caused by the rising costs of oil, food, and other goods and services. EM central banks do not have the luxury of waiting. Many EMs have kicked off interest rate cycles even before their economies recover from the pandemic.

According to the UN’s Food and Agriculture Organization, food prices increased 40% over the previous 15 months, the biggest increase since 2011. The IMF forecasts inflation rates to peak at 6.8% in EM economies before falling to about 4% next year. In contrast, advanced economies are likely to experience inflation that is more modest: peaking at 3.6% in autumn 2021, before falling to 2%.