Inflation round-up

The Great Lockdown so many of us have been living through recently, as governments try to halt the spread of Covid-19, has changed spending habits dramatically. Without restaurants, cafes, bars, most retail outlets, and all but emergency services, our capacity for discretionary spending has been hugely reduced, even for those lucky enough to have kept their jobs and incomes intact. Furthermore, concern about the future has made us cautious, so we're saving more if we can.

Demand for luxury and non-essential goods and services has slumped to extraordinarily low levels, therefore, compelling sellers to cut prices to entice customers. The number of countries recording negative inflation has almost doubled in a month (from 11 to 21) and virtually all the newcomers are developed economies. With so many people having lost livelihoods or at least some of their pay, lower prices for discretionary items could persist for some time. As economies gradually reopen, production and supply are likely to catch up ahead of demand, so the disinflationary trend could intensify as more sellers chase scarce custom.

However, there are some items we can't do without; food, in particular. While loss of production due to the pandemic has had only a small inflationary influence on prices of non-essential goods, because we've had little chance or desire to buy them, it has had a big upward impact on food prices, because our need for nourishment has not declined.

Higher food prices are less evident in the developed world, where supermarkets' strong buying power and the efficiency of agriculture are enough to hold costs down to some degree. However, in emerging economies, sudden production stoppages can cause real scarcity and soaring prices. Warnings of a potential food crisis are growing. Additionally, average persons in poorer countries spend much greater proportions of their income on food than those in richer ones do (and much lower proportions on discretionary purchases) and the weightings given to food items in national inflation calculations are therefore greater in these places.

The result of all these factors is a big inflation divide between richer and poorer nations due to Covid-19, with many emerging markets now seeing consumer price indices rising sharply, whereas the developed world is generally witnessing lower inflation. Among those worst hit by rising food prices are Turkey, Sudan, Lebanon and, of course, Venezuela, where the government is trying price controls - again!

Such situations can cause difficulties for international mobility teams trying to manage staff assigned abroad. The basic mathematics of rapid divergences in inflation trends between home and host countries can bring sharp revisions in cost-of-living indices and not always in the direction or to the degree expatriates might be expecting, given the local headlines they may have seen. The calculations also take the exchange-rate factor into consideration and this can often offset the inflation impact. Furthermore, as we have seen, even when official inflation in the host location jumps sharply, it may be almost entirely due to higher food costs, and expatriates still tend to spend the same proportion of their income on food while abroad as they did back home. Being mostly well-off, that proportion is generally much lower than it is for locals, so they are considerably less affected.

ECA's cost of living surveys (the March 2020 one being published shortly) always reflect expatriate spending patterns (rather than those of local nationals), wherever they are from and wherever they are posted to, which means you don't need to worry about how much they might need to spend on food, or anything else; it's all accounted for in the index. Meanwhile, hopefully the information in this blog post will help you persuade your international assignees that they don't need to worry either, because our indices, applied consistently over time, will make sure they aren't out of pocket. As always, expert advice is also available from your ECA contact.

In other inflation news, Saudi Arabia has announced that it will raise VAT from 5% to 15% on 1 July 2020. It's easy to see why the government needs more money, given the twin shocks of the coronavirus pandemic and the collapse in oil prices. Some of Crown Prince Mohammed bin Salman's grand projects and reforms are seriously threatened by the state's loss of revenues. Many might say he only has himself to blame, because the oil price war, which sent the cost of crude below zero briefly in April, was launched by the man himself and spectacularly backfired. Other austerity measures have also just been introduced, but the changes could further harm the economy. After all, the general global trend is to cut VAT, not raise it, to try to stimulate recoveries from the harm the coronavirus has wreaked.

Finally, here is this month's watch list: