Inflation trends around the world have continued to diverge to extremes, resulting in unusually large numbers of countries with either very high or very low inflation. Interestingly, a major driver of both these scenarios has been the decline of oil prices. For many countries, cheaper energy, alongside weak domestic demand, has helped keep inflation down. However, for oil-producing countries, lower crude prices have reduced revenues, expanded budget deficits and forced governments to remove subsidies for fuel and other staples (Nigeria and Kuwait are two recent examples), thereby raising inflation.
Budget deficits in oil-producing and other developing economies have also been responsible for some of the exchange rate volatility seen in the survey period. These countries’ currencies have been under pressure on international markets, in several cases forcing large devaluations (and therefore higher import-price inflation). Nigeria and Egypt are two such examples, both of which had also been advised to liberalise their currency regimes by the IMF. Other factors behind exchange rate volatility this year include political shocks, such as the United Kingdom’s vote to leave the EU and the impeachment of Brazil’s president.
The map below looks at how key events around the world have affected cost of living indices during our survey period. This should act as a useful guide when considering whether to amend assignee cost of living allowances to ensure that spending power is maintained.
If you require any assistance, need advice regarding currency fluctuations or are simply looking for data, please get in touch with your ECA representative.
Post survey developments
The value of the US dollar has been rising since the September survey and pulling up currencies linked to it, such as the UAE dirham and Hong Kong dollar. This trend is likely to continue as the US Federal Reserve prepares to raise interest rates for only the second time since 2006.
The election of Donald Trump, who has pledged to renegotiate the North American Free Trade Association and force Mexico to pay for a wall along its border with the USA, has led the peso to drop significantly in value since the September Cost of Living survey.
Meanwhile, the British pound has weakened further and remains volatile. The Bank of England has projected a rise in inflation throughout 2017 as higher import costs are passed on to the consumer.
However, the UK pound is not the only major currency that has weakened. The Japanese yen has also fallen back significantly in recent months. The Turkish lira has too, due to a worsening economy and difficult political situation.
In response to International Monetary Fund policy recommendations and to secure further funding, Egypt removed currency restrictions in November and allowed the pound to float freely. It has since halved in value against the US dollar. Expect inflation to increase sharply in the coming months. Prices will also be impacted by the introduction of a Value-Added Tax (VAT) regime in October at a standard rate of 13%, compared to the 10% sales tax in place previously.
Sudanese inflation has picked up significantly recently as the black-market exchange rate has continued to diverge from the official exchange rate, hitting record lows. The government is attempting to boost foreign currency reserves by allowing expatriates (but not companies) to sell the government US dollars at a rate closer to black-market rates, but this has done little to stabilise the economy.
In Libya, the dinar, which is currently pegged to the US dollar, is coming under increased pressure as low oil prices and a poor economic and political situation hurt government finances. Black-market exchange rates are becoming more commonly used and are diverging significantly from the official rate. Expect a devaluation in the short to medium-term and the possible removal of government subsidies.
At the end of November, an OPEC agreement to cut production immediately raised oil prices and has since boosted currencies of major crude producers.
ECA’s interim surveys
We are currently undertaking an interim survey for the following countries due to high inflation expectations: Angola, Argentina, Egypt, Malawi, Mozambique, Nigeria, South Sudan, Surinam and Venezuela. The results will be available in January 2017.
Survey facts & findings
- New locations in this survey include Nantes (France), Bursa (Turkey), Guayaquil (Ecuador) and Tripoli (Libya), taking the total number of locations surveyed to 461 in 194 countries.
- Our September 2016 survey saw the number of locations with deflation rise to 74, compared to only 50 in our September 2015 survey period.
- The number of countries with annual inflation of more than 20% also rose from seven to eleven over the same period.
To see more facts & figures check out our upcoming cost of living survey blog post.
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