Inflation increases social inequality

Global trends

Handelsblatt International correspondent Torsten Riecke analyzes interesting data and trends from all over the world in his weekly column. You can reach him at [email protected].

(Photo: Klawe Rzeczy)

Inflation is currently the biggest problem for the world economy. Whether it’s about the economic consequences of the war in Ukraine or the effects of the severed supply chains. Whether it’s about the transformation to a climate-neutral economy or the impending food shortage. Everywhere the price surge is the driving force of the crises.

Unfortunately, how best to fight inflation was also the most debated topic at the World Economic Forum (WEF). While 14 percent of the chief economists in developed countries surveyed by the WEF think inflation is the greater risk and are in favor of raising interest rates, 27 percent of economists think the risks of a recession as a result of tighter monetary policy are greater.

A look at the world crisis map reveals that the poorer countries in Africa in particular have the greatest concerns about inflation. The reason: the continuing rise in food prices can quickly lead to a catastrophic famine there. In the USA and Europe, on the other hand, people fear a loss of prosperity rather than starvation.

The fact that inflation increases social inequality is not only evident at the global level between rich and poor countries. In the western industrial nations, too, it is dismantling the social kit that holds our societies together. For Great Britain, the Institute for Fiscal Studies (IFS) found that the inflation rate on the island for the poorest part of the population, at 14 percent, is about twice as high as for the top earners.

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The reason for this is obvious: poorer families have to spend a larger part of their household income on energy and food and are therefore hit particularly hard by the sharply rising prices in these areas. Energy costs alone are expected to double in the UK this year. That, too, is social explosives. That is why the British Finance Minister Rishi Sunak has now launched emergency aid of almost 15 billion pounds to alleviate the greatest need.

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The situation in Germany is not quite as dramatic. But it is apparently dicey enough that Labor and Social Affairs Minister Hubertus Heil (SPD) proposed “climate money” for citizens with less than 4,000 euros monthly gross income for 2023 at the weekend. As in Great Britain, this should dampen the effects of rising living costs and, as on the island, should thwart the savings plans of the treasurer, Christian Lindner in this country.

Rate hikes are necessary, but they are a blunt sword

What does all this have to do with the economists’ dispute about the right recipe for fighting inflation? Very much. In Davos, it was shown once again that the planned interest rate hikes by the central banks are quite well suited to curbing the government-induced excess demand after the pandemic. However, interest rate hikes do not help at all against the main causes of inflation, high energy and food costs and disrupted supply chains.

On the contrary, they slow down growth and employment, which in turn hits the world’s poorest hardest. High inflation rates or high interest rates – both increase social inequality. It is therefore right for the state to mitigate the harshest consequences of this dilemma.

More: War, inflation, slump in growth – this is how you save your money now.

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