Why Is Inflation so High, And Will It Stay That Way?

Globally, inflation is rising, and the prospect of a cost-of-living crisis looms for many people. Driven by food and energy costs due to the COVID-19 pandemic, inflation has been exacerbated by the Russian invasion of Ukraine. According to the UN’s Food and Agriculture Organisation (FAO), the monthly food price index has recorded an increase of 12.6% between February and March, an all-time high since 1990.

Similarly, Pakistan is not far behind in this race. The inflation rate in Pakistan increased to 21.3 per cent in June, which is the all-time high since December 2008, when inflation stood at 23.8 per cent. According to the Pakistan Bureau of Statistics, inflation has increased by 19.8 per cent in urban areas and 23.5 per cent in rural areas.                                                                                                                                             

The bizarre rise in inflation was provoked by the extraordinary demand for goods in 2021 as countries emerged from lockdowns, shops opened, and people could go out and buy stuff with money saved during weeks of economic inactivity. In this case, where demand becomes more significant than the supply, the government either gets shortages or price increases. However, this situation got even more critical after the Russia-Ukraine war started. The war in Ukraine has disrupted global supplies of commodities such as wheat, resulting in an increase in prices over concern that the war will disrupt future supply.

In this case of global inflation, the governments can’t do much to control it like governments can’t change the oil price, central bankers can’t suddenly change the price of wheat and other commodities. But there are things governments can do to mitigate the consequences of higher inflation. For example, if an item is often taxed, the governments can temporarily lower the tax on it or reduce sales taxes on other products to try and make life a little more affordable.

In conclusion, governments can do much more to mitigate the impact on the cost of living, like encouraging investment in renewable resources. But in the short term, there is a limit to what governments can do to offset price increases.