Inflation is hitting everyone!Relaxing after a long day of Zoom meetings while reading the daily infection rates and eating your favorite KFC meal. One thing that shocks you more than the daily ICU count is your blazing twist meal’s price. Once done with the last bit of your “more” expensive meal, your plumber is asking for 50% more than what he usually asks. This is a common feeling everyone is having, and it is a global issue affecting everyone around the world. Globally, Inflation rates are soaring high as the world continue to harness the lingering impact of the COVID-19 pandemic. The same challenges are being faced by the GCC nations as they observed sudden adjustments in the commodity prices due to the changes in the global market. Two major factors that fueled 2021 inflation rates were supply chain constraints and labor market supply shortages. Supply Chain was directly affected following the guidelines mandated by the government. The restrictions have put more pressure on the production side where manufacturers have insufficient capacity to match the surging market demand. Also, the rising energy and shipping costs are weighing more on the production costs and profit margins of the company. This forced the companies to pass along the price adjustments to the consumers. Meanwhile, labor shortages happened when employees became infected and need to self-isolate. Turnover rates were too high as well as employees changed their priorities while coping up with this new normal. These factors have led companies to increase their labor cost.
The effect was also felt in retail and foodservice sectors following the menu price hikes in the middle of 2021 between 8% to 17%. E.g., McDonalds in the USA adjusted their menu prices by 8% as to compensate the rising ingredient costs. The perceived increases have impacted all the industries as well as the growth of the inflation rate. Furthermore, the inflation rate projection for this year will be expected to soar high as Russia and Ukraine crisis continue to escalate tensions. These uncertainties may severely hit the global market following the drastic price hikes in energy, crude oil, corn, and wheat.
Two major factors that fueled 2021 inflation rates were supply chain constraints and labor market supply shortages.
McDonalds in the USA adjusted their menu prices by 8% as to compensate the rising ingredient costs.
What is Inflation? And how it is measured?Consumer Price Index (CPI) is one of the economic indicators used by the government to measure inflation, monetary policy, and the economic growth over time. While Inflation is an indicator of the rate of increase in prices over period of time as reflected in the Consumer Price Index. CPI measures the prices of goods and services being consumed by households. Also, it weights various product categories and come up with an aggregated index gathered from Household Expenditure Survey. Governments sample their population and conduct annual surveys on household consumption of different products which in turn fuel the CPI index and consumption behavior. A base year is also included in the calculation which indicates the starting year where indices are being calculated. Adjustments in the base year are applied later on to meet the required conditions set by each respective country.
All GCC countries follow the international Classification of Individual Consumption by Purpose (COICOP) published by United Nations to unify the categorization of the major commodities in the CPI. However, the weights used to calculate the CPI differ in some of the GCC countries as they not fully adopted the internationally recognized best practice methodologies of the CPI compilation. The weights for these commodity groups are based on their order of importance as shown below:
Global inflation overviewThe unprecedented COVID-19 crisis caused massive economic impact which led to swift global market changes and disruptions. Inflation was one of these changes that impacted different economies around the world. Inflation was driven by several factors such as substantial increase in the costs of the goods and services, rising consumer demand with supply shortages, and wage hikes. The price increases in essential commodities caused a sharp rise in the Consumer Price Index and therefore affecting the inflation rate. Leading and emerging economies in the world were hard hit by inflation at different rates since COVID became a global pandemic. These countries are still suffering from such unparalleled hikes like US and Germany where they registered 7% and 3% inflation rates in 2021 compared to 1% for both countries in 2020.
US and Germany registered 7% and 3% inflation rates in 2021 compared to 1% for both countries in 2020.
GCC inflation overviewThe GCC countries are mostly nonproducing countries and rely on international importation of goods. Such import reliant economies should have reflected similar global inflation rates in their countries. However, according to The Statistical Centre for the Cooperation Council for the Arab Countries of the Gulf (GCC – Stat) GCC nations registered a modest average inflation rate of 2% in 2021. Kuwait and Qatar led the regions’ inflation with the same rate of 3%. Conversely, Bahrain’s Consumer Price Index deflated by 1%. Strong government measures in controlling prices and monetary intervention policies delayed inflation from rigorous “official” increase. However, the strong government interventions are causing businesses to hold back from increasing their prices despite the realistic justifications of the price hikes. Commodity price rebound, oil price hikes, supply chain factors, and induced recovery of consumer demand are some of the factors which drove the slight rise in inflation.
What is driving inflation?
GloballyCountries around the world including the emerging and the advanced economies experienced the sharp upswing in inflation caused by several factors. There are five main inflation drivers reordered across the globe: higher consumer spending, price spikes in traded commodities and packaging, supply chain issues, manpower shortages, and wage hikes. Supply Chain has been directly affected after the government’s curtailed activities of non-essential industries and working force. It started with factories being shut down and/or repurposed to cater to pandemic needed goods and services. Ports were also hit by workflow disruptions because of lockdowns and government shutdowns. Land, air, and sea transport were also affected due to a big portion of the workforce either getting infected or delayed due to new border crossing measures. Compounded delay factors increased the pile of goods at borders and in between. Moreover, with the long enforcement of lockdowns in the previous year, consumers spent more on leisure items which was higher and different than their usual spending. For example, the semiconductor crisis around the world was a result of chip manufacturers adjusting their manufacturing lines to cater to higher profit chips in smartphones and gaming consoles rather than older/less profitable chip models used in cars. The rising inflation is also hitting the global market including the retail and foodservice sectors. These sectors further pushed price hikes in their leading items as to adjust the earnings of their companies as well as to address supply chain bottlenecks. Chanel, Louis Vuitton, Crocs, Gucci, Michael Kors, Hermes, Jimmy Choo, Ralph Lauren, Celine, and Dior were among the leading global luxury brands who have imposed price increase in 2021. E.g., selling prices were up reaching 9.1% while Crocs, Louis Vuitton, and Ralph Lauren increased prices as much as 17%. Scaling back discounts and price hikes were the strategies of these brands to offset their lost sales in 2020.
On the other hand, foodservice brands such as Krispy Kreme, Wendy’s, Chipotle, Taco Bell, Chili’s, Domino’s Pizza, The Cheesecake Factory, McDonalds, and Dunkin’ hike prices to make up with the inflation. Significant price increases were recorded in leading food chains such as Taco Bell at 10%, McDonalds’ and Dunkin’ at 8% price hikes. Among the other reasons discussed above, the foodservice brands were forced to increase their prices due to increases by their food suppliers. According to Brazil’s statistics agency IBGE, meat prices rose by 8.45% in 2021. Brazil is the largest beef exporter in the world and inflation is hitting the source of the worldwide meat which will eventually affects all.
Chanel, Louis Vuitton, Crocs, Gucci, Michael Kors, Hermes, Jimmy Choo, Ralph Lauren, Celine, and Dior were among the leading global luxury brands who have imposed price increase in 2021.
Further increase will be expected to happen this year as Russia and Ukraine crisis continue to intensify. Russia and Ukraine are well known suppliers of more than a quarter of global wheat exports in the world. While the latter country accounts for almost half of sunflower oil exports. With the on-going war, supply chain may experience heavy food supply disruptions and will worsen the current supply chain bottlenecks. E.g Ukraine being the breadbasket of Europe, Middle East, and North Africa will cause major supply shortages and food security issues in the market if the produced grains fail to be shipped to the destination countries. Currently, the war has led to an embargo on all commercial vessels in the inland sea of Azov connecting to Black Sea which affects the sea transport of the food supplies. This will push more pressure on suppliers and exporters to a higher price hike. With these changes, countries are diversifying and repurposing their food supply sources as to keep up with the surging market demand.
Meat prices in Brazil rose by 8.45% in 2021
GCCSince GCC countries are importing 90% of their goods from international sources, the prices of the commodities and consumer goods are directly affected whenever global market adjusts their market prices. E.g., Cocoa growers led by African countries have increased their prices due to several factors such as dry season and supply scarcity. Dairy products also increased their prices by 25% to 50% due to the latest price of agricultural inputs and production costs. With this, local companies and importers incurred the new price adjustments from the supplier and then passed on to the consumers. In addition, the on-going repercussions posed by COVID-19 crisis has a layering effect where significant jumped in sea and air freight costs including the ground transportation outside of the country boosted costs. E.g., the average shipping price of a 40-foot container surged by 348% compared to pre-pandemic cost as discussed during UN Conference on Trade and Development (UNCTAD).
As reported by GCC Stat, the aggregated GCC Consumer Price Index in 2020 was 100.08, higher by 2% compared to the previous year. Alcoholic Beverages, Tobacco, and Narcotics registered the highest commodity prices with 113.29 index and reached 7% inflation. The Value Added Tax (VAT) imposed in UAE, Bahrain, Oman, and Saudi Arabia intensify the price index’s increment due to its tax implications. Bahrain adjusted their VAT rates from 5% (2019) to 10% (2022) while Saudi Arabia implemented VAT rates from 5% (2018) to 15% (2020) . Meanwhile, the recent implementation of VAT in Oman last April 2021 has taken a toll to the increasing inflation of the country. Excise Tax is also another factor to consider which were adopted by the 5 GCC countries excluding Kuwait. UAE initiated the excise tax across all its emirates in 2017 followed by Saudi Arabia and Bahrain in the same year. Qatar and Oman were the last nations to implement the sin tax in 2019 and 2020. The imposition of excise tax aims to reduce consumption of unhealthy and harmful commodities while the collected revenues will be used for public service projects. Tobacco products are subject to 100% excise tax which was reflected in the high consumer price from 2017 up to the recent year. Food, non-alcoholic beverages, restaurants, hotels, and furnishings are also dominating the consumer price index with the indices of 108.46, 105.44, and 103.19, respectively. The mentioned sectors are some of the contributors to the excise taxes that are subject to the following rates such as energy drinks at 100% in UAE, soft drinks at 50% in Saudi Arabia and Bahrain, and beverages at 50% in Oman. Major economies launched generous government backed funding programs of those affected by layoffs as a result of COVID. Governments in the GCC however had minimal job backing programs to support their local workers. Locals in the GCC are mostly employed by the government and governments retained their local workers despite shutdowns. The local GCC consumer was not affected by the global layoff phenomenon witnessed and benefitted from some of the government backing stimulus packages launched to support the different economies in the GCC. Job security stimulated by better supporting government measures led to higher consumer spending and therefore fueling inflation.The jumped in the prices were caused by the manpower shortages which disrupts the overall business activities of the retail, F&B, and service markets in the region. These industries’ labor market supply in Kuwait, Qatar, and UAE are mainly occupied by the overseas workers. International workers were affected after the government’s-imposition of flight restrictions which prevented employers to hire and attract potential overseas workers abroad. Companies which had expansion plans had to recruit from the local market and provide staff incentives to join their firms at a higher rate. This salary change was reflected in Salaries in the GCC’s surged by 9% in 2021 as compared to 1% in 2020. However, less drastic effect in Saudi Arabia and Oman labor markets were observed due to its localization of manpower.
The average shipping price of a 40-foot container surged by 348%