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High inflation affects countries around the world

By: BILL BLEVINS

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Bill Blevins is Managing Director of Blevins Franks. He has specialised in expatriate investment and tax planning for over 35 years. He has written books and gives lectures on this subject in Southern Europe and the UK.

INFLATION CONTINUES to rise at rampant speed. It is not just affecting Europe, the UK or the US but countries around the world are suffering due to high prices.

Fuel and food prices have been the force behind the persistent rises. US crude oil price has surpassed 144 US dollars, more than double a year ago. The President of OPEC, Chakib Khelil, has predicted that the price of a barrel of oil could surge to 170 US dollars within months. The soaring fuel costs are affecting all transport costs and exacerbating the hike in food prices, already at record high levels because of shortages due to poor harvests and increased demand.

In the Eurozone inflation hit an all-time high of four per cent in June up from 3.7 per cent in May. Inflation at four per cent is now double the European Central Bank’s (ECB) target of “below but close to two per cent”. It was in November 2007 that inflation hit 3.1 per cent and has risen steadily since. At four per cent it is the highest rate recorded since the statistical watchdog Eurostat began recording inflation data in 1997.

The ECB is fighting to control spiraling inflation against stagnant growth. Inflation forecasts have indicated that Eurozone inflation would remain significantly higher than the Bank’s target rate into next year.

Inflation

Inflation in Portugal in May (latest data available) was actually 2.8 per cent. Food inflation was 3.9 per cent compared with 7.5 per cent in the EU. Electricity was 3.4 per cent in Portugal and 5.6 per cent in the EU and gas was 10.4 per cent in Portugal and 9.8 per cent in the EU.

Even though Portugal’s inflation rate is significantly lower than the Euro area this has not always been the case. In 2001 Portugal’s inflation rate broke through four per cent between January and November and in fact in March of that year it hit 5.1 per cent while inflation in the EU stood at the target level of two per cent. In 2002 Portugal’s inflation rate was at four per cent and 4.1 per cent while EU inflation was at two per cent and just over.

In the UK inflation hit 3.3 per cent in June and Mervyn King, the Bank of England (BoE) governor, warned that it could reach four per cent by the end of the year. It is the highest rate recorded by the Office for National Statistics since the index started eleven years ago. The BoE’s target for inflation is two per cent.

According to a survey in The Times, more than two thirds of UK motorists have cut down the number of car trips they make due to the excessive cost of fuel. This has impacted on visits to out of town shopping centres, the school run and even driving to the local shops. The price of a gallon of diesel reached a record six pounds sterling at the end of June.

Families are also reeling from increased food prices, up by over 15 per cent since last year, as well as higher taxes.

Tight budgets

Huge increases in domestic energy bills are on the horizon with forecasts for them to rise by as much as 40 per cent for this coming winter. Householders could be forking out on average 400 pounds sterling or more a year on gas and electricity. Wholesale gas prices, which are closely linked to the price of oil, have risen by over 70 per cent so far in 2008.

King has warned that living standards will not rise for a year. The rapid increase in the price of fuel and food would tighten household budgets further while income growth would be constrained by economic downturn. People had to be persuaded that ‘facing up to reality’ was preferable than securing higher wage demands to counter the effects of inflation and a fall in living standards.

Latest research by the Daily Telegraph and the price comparison website moneysupermarket.com reveal that the real cost of living index is around 9.5 per cent. High fuel and food prices along with increased taxes and other domestic bills means that the average family is having to cope with a real inflation rate that is nearly three times the official rate.

Even though inflation in the EU and UK is creeping up, it is nowhere as near as staggering as the double figures it was in Britain in the 1970s, nor is it as high as other countries across the globe. According to Bespoke Investment Group’s statistics on global inflation rates, Venezuela is top of the list with inflation at 31.40 per cent followed by the Ukraine at 31.10 per cent. In Russia it is 15.10 per cent and Bulgaria 15 per cent. Turkey’s inflation stands at 10.74 per cent, Indonesia 10.38 per cent and the Philippines 9.60 per cent. Romania’s inflation rate is 8.46 per cent, China 7.70 per cent and India 6.02 per cent. While many Europeans are suffering from the increased cost of living, the EU and UK actually have two of the lowest inflation rates worldwide, with Japan the lowest at an unbelievable 0.80 per cent.

In the US inflation is 4.2 per cent and in its latest interest rate meeting the Federal Bank kept interest rates on hold at two per cent, despite a warning that inflation would continue to rise. Chairman of the Federal Reserve Bank, Ben Bernanke, has the unenviable task of balancing the need to trigger an economic recovery by keeping interest rates low and to curb inflation by increasing interest rates. The Fed’s two per cent interest rate is not helping countries in Asia that manage their exchange rates against the Dollar and if US interest rates are low those countries targeting the Dollar will follow.