Paradox: world and national inflation

Inflation has risen in most countries of the world. Before the pandemic the average was 3.5% per year. But last year it was close to 9% and it is estimated that this year it will be around 7%. In similar periods, Bolivia had inflation that fluctuated between 1% and 3%.

Therefore, the question arises as to why inflation is high in the rest of the world and low in Bolivia. I will focus mainly on the first to explain its causes.
As we well know, the covid-19 pandemic in 2020 meant a sharp decline in world production that fell 3% that year, by far the most acute crisis in recent decades.

In the midst of uncertainty, the States chose to provide aid to the population, particularly the most vulnerable. This was through the direct transfer of resources (bonds) as well as lines of credit for companies. Central banks contributed by aggressively lowering interest rates and providing liquidity to financial systems, so that the contraction is not so sharp.

The particularity of the pandemic was its speed. Indeed, in four months the industrial production of the world fell by 13%, a magnitude similar to that of the severe recession of 2008-9, which was slower (9 months).
But the recovery was much faster. The improvement after the 2009 financial crisis took 29 months (more than two years), while in the pandemic it took just 11 months.

It is evident that it was such an acute and painful crisis due to the loss of human lives, but also of jobs and companies; and that it required forceful measures. However, before long, the world economy was flooded with resources. I do not think it is the fault of the States (governments and central banks), because the degree of uncertainty was high and the paralysis was extreme.

Given this imbalance, inflation began to rise rapidly. Add to that the effects of higher food and fuel prices from the war in Ukraine and higher transportation costs from disruptions at key Chinese ports, and the spiral was sharper.

The States had to abruptly change their approach and see how to collect excess liquidity also quickly to contain the rise in inflation. For that reason, central banks reversed financial support measures and raised interest rates.

With a measure, which goes in the right direction to moderate inflation and the cost it represents in the population, activity began to “cool off.” For this reason, world industrial production in 2022 was almost unchanged, generating fears of a new recession that could affect even a third of the countries in the world.

This Tuesday, the International Monetary Fund indicated that, according to its studies, we may be slightly less pessimistic due to this combination of high inflation and low dynamism. The agency points out that inflation is falling faster than expected and that some countries, mainly China, are recovering more dynamically.

In any case, worldwide, income in several cases has fallen. Only in the United States, the real income of families fell 3% between December 2021 and 2022. Inflation has generated discomfort in the population of the most affected countries.

In the Bolivian case, inflation has been low mainly due to: i) average family income fell by around 10% between 2019 and 2022, which contrasts with the formal salary, which is 7% higher; ii) there are subsidized or regulated prices without variation, including a very relevant one such as the nominal exchange rate; and, iii) the depreciation of the currencies of neighboring countries and the increase in smuggling, especially of consumer goods, mitigated external inflationary pressures.

A coincidence between the country and the world is that income is lower, either due to the drop in wages or the rise in inflation.
The challenge in both cases is how to recover lost revenue and opportunities.