The inflation rates within the G20 nations are expected to stay elevated due, in part, to the recent decision by Russia and Saudi Arabia to extend oil production cuts despite growing evidence of a Global economic slowdown. This is primarily because oil plays a pivotal role as an essential input in the production of numerous goods and services across their economies. Nevertheless, it’s important to note that the inflation trajectories in these G20 countries could also hinge on various additional factors. These factors encompass the economic policies pursued by their respective governments[1], the dynamic interplay of supply and demand in their local markets, and the fluctuations in their currency exchange rates. Consequently, the inflation rates within the G20 bloc may exhibit diversity and resist easy predictability, as they are likely to be influenced by the distinct circumstances unique to each individual country[2].
The diversity in inflation rates prompts a pivotal question: Do the economic outcomes of a high yet stable inflation rate resemble those of rising and variable inflation rates? In this short article, we will compare these two scenarios, highlighting their advantages and disadvantages, with the goal of understanding how they impact a nation’s economic performance. This discussion is related to the ongoing dialogue among economists, policymakers, businesses, and consumers regarding the origins, effects, and potential remedies for various forms of inflation across various situations.
Scenario 1: High but stable inflation
High but stable inflation means that the inflation rate is consistently above the standard 2% central bank target rate, but it does not fluctuate significantly over time.
| s/n | Advantages | Disadvantages |
| 1 | Consistently high yet stable inflation can act as a safeguard against the adverse consequences of deflation, which is characterized by a persistent decline in prices. Deflation can prove highly detrimental to an economy, as it deters consumer spending, elevates the real burden of debt, and leads to reduced economic growth and heightened unemployment. | Consistently high but stable inflation implies a gradual erosion of the purchasing power of money, resulting in the ability to purchase fewer goods and services with the same amount of currency. This gradual erosion can diminish the real income and wealth of individuals and households, particularly those who depend on fixed incomes or savings. |
| 2 | Consistently high but stable inflation can facilitate the adjustment of wages and prices across various individuals and sectors. For instance, when a worker’s productivity experiences an increase, their wages may grow at a pace exceeding the inflation rate, resulting in a real wage boost. Conversely, if a worker’s productivity declines, their wage growth may lag behind the inflation rate, leading to a real wage decrease. Likewise, in sectors that become more competitive, prices can rise at a rate surpassing the inflation rate, causing a real price increase. Conversely, in sectors that become less competitive, prices may increase at a rate slower than the inflation rate, resulting in a real price decrease. These adjustments aid in the more efficient allocation of resources and contribute to overall economic improvement. | Consistently high but stable inflation can influence the decisions and expectations of economic participants in unpredictable manners. For instance, when consumers harbour uncertainty about future price levels, they might stockpile goods or defer purchases, potentially causing imbalances like shortages or excess supply in certain markets. Similarly, when businesses grapple with uncertainty regarding future costs and revenues, they may delay investment or production endeavours, resulting in reduced output or elevated inventory levels. Moreover, when lenders confront uncertainty concerning the future value of currency, they might demand higher nominal interest rates or curtail credit availability, potentially leading to increased borrowing costs or restricted financial access. |
| 3 | Consistent high but stable inflation has the potential to boost economic activity by promoting expenditure, investment, and lending. For instance, when consumers anticipate future price increases, they may increase their current consumption of goods and services to circumvent higher costs down the road. Similarly, if businesses anticipate heightened demand and increased profitability in the future, they may boost investments in capital and technology to expand their production capabilities. Furthermore, when borrowers foresee rising incomes and lower real interest rates in the future, they may opt for increased borrowing to support their consumption or investment endeavours. | Consistent high but stable inflation implies that domestic prices for goods and services are increasing at a faster rate compared to those in foreign countries. Consequently, this may render domestic products less appealing to international buyers, resulting in decreased exports and heightened imports. Such a situation can have detrimental effects on an economy’s trade balance and current account balance. |
Scenario 2: Rising and variable rate of inflation
Rising and variable rate of inflation means that the inflation rate is not only above the standard 2% central bank target rate, but it also changes frequently and unpredictably over time. For example, an economy may have an inflation rate of 3% one year, 7% the next year, and 4% the following year.
| s/n | Advantages | Disadvantages |
| 1 | The presence of fluctuating and variable inflation rates can signify that an economy is responding and adapting to various shocks and changes in both its domestic and global environments. For instance, when an economy experiences a favourable supply shock, like the discovery of natural resources or technological advancements, its inflation rate might experience a temporary decline due to reduced production costs and prices. Conversely, in the case of a positive demand shock, such as fiscal stimulus or increased consumer confidence, the inflation rate may temporarily rise due to heightened spending and income levels. These shifts in inflation rates can serve as indicators of an economy’s adaptability and resilience when facing diverse circumstances. | A rising and variable inflation rate can have more unpredictable and detrimental effects on the decisions and expectations of economic agents compared to high but stable inflation. For instance, when consumers face uncertainty regarding future price levels, they may either stockpile goods or defer their purchases, potentially resulting in more pronounced shortages or surpluses in certain markets. In the case of firms grappling with uncertainties surrounding future costs and revenues, they may delay their investment or production plans, potentially leading to more significant gaps in output or fluctuations in inventories. Similarly, when lenders are uncertain about the future value of currency, they might impose higher nominal interest rates or curtail credit availability, which could result in more severe financial crises or credit shortages. |
| 2 | A rising and variable inflation rate can exert competitive pressure on both firms and workers, compelling them to enhance productivity and quality. For instance, when firms confront increased costs and reduced profits owing to inflation, they may endeavour to trim expenses or boost revenue by implementing fresh technologies, methodologies, or products. Similarly, when workers contend with diminished real wages and elevated living expenses due to inflation, they may strive to improve their skills or performance through the acquisition of additional education, training, or experience. | A rising and variable inflation rate implies that the value of money diminishes more rapidly and unpredictably over time compared to high but stable inflation. This erosion of the real income and wealth of individuals and households can be more pronounced, particularly for those dependent on fixed incomes or savings. |
| 3 | A rising and variable inflation rate indicates that domestic prices of goods and services are increasing at a quicker and less predictable pace compared to those in foreign countries. This can rapidly and frequently reduce the appeal of domestic products to foreign buyers, resulting in more substantial declines in exports and sharper increases in imports. This can have a more pronounced negative impact on the trade balance and the current account balance of an economy. |
Inflation is a complex and multifaceted phenomenon that can have both positive and negative effects on an economy. The above tables briefly assessed two scenarios highlighting their advantages and disadvantages. There is no clear-cut answer to which scenario is better or worse for an economy, as it depends on various factors such as the magnitude, duration, frequency, and causes of inflation, as well as the policy responses and institutional settings of an economy.
That said, inflation can significantly impact the payment system by influencing consumer behaviour, payment preferences, interest rates, savings and investment decisions, exchange rates, transaction costs, and monetary policies. As inflation rates change, individuals and businesses may adjust their payment methods (for example, a switch to digital payment) that allow for easier tracking and management of their money[3]. Aerapass is uniquely positioned to assist business and consumers with unwavering commitment to innovation, security, reliable and high-quality financial services.
Should you wish to discuss any of issues raised in the note, please do not hesitate to contact: Laurie Antioch, Chief Finance & Strategy Officer.
[1] Fiscal and Monetary policies and sustainability of national Debt.
[2] For instance, in 2023, Turkey maintained a relatively high yet stable inflation rate of approximately 16%, while Argentina grappled with rising and variable rate exceeding 100% during the same year.
[3] During periods of high inflation, people might prefer to use non-cash payment methods like credit cards or mobile payments, as they allow for deferred payments. This contrasts with cash, which loses value immediately due to inflation.