Sirpa sanonut

“Inflation: why should we care?”, Helsinki Times 12.9.2008

12.9.2008 Sirpa sanonutVauras Eurooppa Kannanotot

The global economy has been deeply affected during the last years by a series of major changes, resulting in a high inflation rate, a slowdown in global economic growth and an average decline in activity. Where should we start from to get out of this maze we are stuck in? How could this downward trend be mitigated?

The latest developments in the global economy, for instance the devaluation of the US dollar or the recent failure of the Doha negotiations, have brought the latter to a critical state. There has been a general slowdown of growth in developed countries, while growth mainly remains in emerging markets. The tensions on the financial markets and the subprime crisis lead to the fact that banks showed bad or negative results, impacting in a negative way both on the trust upon banks and financial stakeholders, hence a significant decline in market investment. In the current state of events, globalisation tends to spread the effects of the crisis.

The political climate, particularly the relations and conflicts between the main oil producing countries deeply affect global economy. Fast developing countries such as China and India have an outstanding growth and thus tend to consume more energy. Demand in energy is higher than ever and we arrived to a point where energy resources threaten to deplete. Access to energy resources depends on the good will of the producers. In a world of growing demand for energy but stagnating level of energy production, where oil prices reach record peaks, it is important to find a balance in order to mitigate energy dependency. Renewable energies as well as biofuels then become of utmost importance, not only when it comes to sustainable development.

This rise in the prices of energy resources plays a role in increasing non-energy commodity prices, mainly food products. Furthermore, along with the development of emerging countries, people’s consumption patterns tend to evolve and diets tend to improve, which exerts pressure on the price of raw materials and food products. It is evident that the rising demand of food products in China and India can have a strong impact on prices. The resulting high level of prices makes it difficult for the poorest people to access basic food products, which poses a hurdle to the development of children.

The rise of energy- and food prices are the main triggers of a high inflation. The inflation rate in the European Union has reached worrying proportions during the last months: according to Eurostat, the annual inflation rate in July 2008 was 4.4%, which represents double the target set up by the European Central Bank. None of the member states has managed to maintain its inflation level under this threshold.

It appears that the evolution of prices remains uncertain and further increases are likely. Dominique Strauss-Kahn, the International Monetary Fund managing director, fears that the upward evolution of both oil and food prices could be driving up to 75 developing countries close to a ’tipping point’. It is clear that it is the poorest countries who suffer the most from the direct consequences of rising prices, exerting influence both on their political stability as well as on their development. The same is true on the citizen level, where the people with the lowest incomes suffer the most from the consequences of inflation, their purchasing power being seriously affected.

So what are the possible solutions to the complex situation?

We could be tempted to think that the declining purchasing power could be resolved by pay rises. However, as Jean-Claude Trichet, explains, massive pay rises would be anything but a solution, triggering a vicious circle of even larger increases of commodity prices. It is imperative to focus on inflation and to carefully monitor its development. The best way not to enter such a vicious circle is to decide together. Indeed, the European Union would need a common negotiation mechanism involving tripartite discussions between the institutions, national governments and employee trade unions, in order to determine the level of tax deductions for instance. This type of mechanism exists already in Finland within the Comprehensive Income Policy Agreement, where the government negotiates with employees’ and employers’ trade unions to reach common agreements in terms of revenue policy, so why not set up this good practice on the EU- and international level?

However, if you are offered a pay rise, declining it for the sake of the global economy will not help, as someone greedier will take advantage of it and you will be the one suffering from it, so let’s all be greedy just in case.

Another way to mitigate inflation, coupled with the limitation of the energy dependency to Russia and the Middle-East, would be the appropriate management of the food chain, by controlling where the food is produced, where it is exported to, and by optimising food stocks. Although food prices rise considerably, we do not need GMOs or such drastic methods. As a matter of fact, enough food is produced in the world to meet demands, but the problem lies in the tremendous amount of food that is wasted every day. This issue can even be dealt with on the local level. For example, restaurants could, instead of serving huge portions hardly anyone finishes off, set up a system of second helping for the hungriest of us, which would help reducing the growing waste mountains.

Sirpa Pietikäinen

Sirpa Pietikäinen
Tutustu Sirpaan

Kysy Sirpalta

Kysy Sirpalta

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