The recent pickup in inflation has caught business leaders and economists around the world by surprise.
In spring 2020, the coronavirus crushed the global economy: governments ordered lockdowns, businesses closed or slashed hours and families stayed home. Companies braced for the worst, canceling orders and putting off investments.
In an attempt to stave off economic catastrophe, wealthy countries — most notably the United States — introduced trillions of dollars worth of government aid, an economic mobilization on a scale unseen since World War II. Central banks also slashed interest rates in a bid to revive economic activity.
But those efforts to jump-start economies have had unintended consequences: as consumers felt more emboldened to spend the money they had received through government assistance or low-interest borrowing, and vaccine rollouts encouraged people to return to restaurants, bars and shops, the surge in demand tested the capacity of suppliers to keep pace.
Ports and freight yards were suddenly clogged with shipments, and prices began to rise as global supply chains seized up — especially as new outbreaks of COVID-19 sometimes shut down factories and ports in Asia.
The rise in prices has been dramatic. Inflation in the United States surged to 6.2% in October, the highest since 1990, and the International Monetary Fund predicts that world consumer prices will rise 4.3% this year, the biggest jump since 2011.
It is most pronounced in the developing economies of central and Eastern Europe, with the highest annual rates recorded in Lithuania (8.2%), Estonia (6.8%) and Hungary (6.6%). In Poland, one of Europe’s fastest-growing economies, inflation came in at 6.4% in October, the highest rate in two decades.
Several shoppers at a vegetable stand in Warsaw said they are anxious about rising prices for staples like bread and cooking oil and are expecting the situation to get worse in the new year, when energy prices are set to rise.
The weakening of currencies across central and Eastern Europe against the U.S. dollar and euro is pushing up the price of imports and fuel and exacerbating the pinch from supply backups and other factors.
Hungary’s currency, the forint, has lost around 16% of its value against the dollar in the last six months and slipped to a historic low against the euro last week. That’s part of a strategy by Hungary’s central bank to keep the country competitive and attract foreign companies seeking cheap labor, said Zsolt Balassi, a portfolio manager at Hold Asset Management in Budapest.
But prices on imported goods have skyrocketed, and global oil prices set in U.S. dollars have pushed fuel costs to record levels.
“As the Hungarian forint, and actually all regional currencies, are more or less constantly weakening, this will constantly raise oil prices in our currencies,” Balassi said.
In response to record fuel prices, which peaked this month at 506 forints ($1.59) for gasoline and 512 forints ($1.61) for diesel per liter, Hungary’s government announced a 480-forint ($1.50) cap at filling stations.
While giving some relief, Hungary’s upcoming elections, in which the right-wing governing party faces the most serious challenge since it was elected in 2010, were likely a factor, Balassi said.
“This is obviously a political decision which has huge economic disadvantages, but probably it makes the households happy,” he said.
The political nature of some economic decisions is not limited to Hungary.
Poland’s central bank, also facing a weakening currency, has been accused by critics of allowing inflation to rise too high for too long to encourage economic growth and bolster support for the ruling party.
The bank surprised markets with the timing and size of two base interest rate hikes in October and November in a bid to ease prices, while Hungary’s central bank has raised rates in smaller increments six times this year.
Still, if central banks move too aggressively too soon to control inflation, it could short-circuit the economic recovery, said Carmen Reinhart, chief economist at the World Bank.
She worries about higher food prices that primarily hurt the poor in developing countries, where a disproportionate share of family budgets goes toward keeping food on the table.
“Food prices are a barometer for social unrest,” Reinhart said, noting that the Arab Spring uprisings that began in 2010 were caused partly by higher food prices.
Anna Andrzejczak, a 41-year-old who works for an environmental foundation in Poland, was still a child when Communism ended there in 1989 and has only a vague memory of the hyperinflation and other economic “tumult” that came with the transition to a market economy.
But she feels the prices going up “every time I fill my tank,” with fuel costs having risen some 35% in the last year.
“We’ve had a period of stability in past years, so this inflation now is a big shock,” Andrzejczak said. “We don’t have the price increases that we had then, but I think this will cause big stress.”