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Will I Afford That Daily Frappuccino? – Inflation And Its Consequences

Updated: Mar 18, 2023

“Inflation Is When You Pay Fifteen Dollars for The Ten-Dollar Haircut You Used to Get for Five Dollars When You Had Hair.” – Thomas Sowell


Alex Coiov, 11A


Inflation represents an increase in prices over a given period of time, usually one year. Although inflation is not necessarily damaging because some inflation is characteristic of an expanding, lucrative economy, when prices skyrocket overnight, the purchasing power of consumers is eroded. In a nutshell, people can buy fewer goods with the same amount of money, which is as bad as it sounds. Nevertheless, the pandemic and the war [1] occurring beyond Romania’s right border aggravated the impact of inflation, thus leading to deplorable economic burdens, which make their presence well-known.



Initially, the sudden appearance of the pandemic almost led to the doubling of unemployment rates in Romania. [2] Consequently, the economy slowed down, and the GDP growth fell suddenly in the second quarter of 2020 [3] (‘gross domestic product’, used to measure a country’s economic output, i.e., the goods and services produced/provided within a country’s border). Therefore, the Central Bank of Romania (BNR, known as ‘Banca Națională Română’) attempted to revive the economy through interest rate cuts [4] (cuts in the amount of money someone receives for their savings account/decreases in the amount banks charge customers for a loan, called credit). This ‘expansionary monetary policy’ (expansionary because it expands the economy, monetary since the central bank conducts it) allowed individuals to borrow more money from banks, thus incentivising consumers to spend their income and businesses to invest more. In tandem, the government increased its spending, essentially investing more in healthcare (after all, it was a pandemic). Therefore, the money invested became the income of businesses (pharmaceutical firms, businesses supplying specialised medical equipment, transport companies, et cetera). Subsequently, business owners paid their workers. Afterwards, the money became the workers’ income, the workers then proceeded to buy goods/services, and the money kept flowing through the economy.


Although pandemic-induced damage diminished ever so slightly, a new conspicuous problem emerged: inflation, worsened by the war in the East, a conflict leading to soaring [5] commodity prices across Europe (e.g., natural gas [6] and crude oil [7]). Since interest rates were down and people continued to spend without stopping because decreased interest rates entail lower overall rates on credit (cheaper car, personal consumption, and mortgage loans), inflation grew stronger until it peaked in June of this year, 15.05% [8] precisely. Usually, inflation needs to be kept at bay at around 2%. Although no concrete evidence supports this particular number, most economists agree with such an inflation target. Nevertheless, the current astronomical levels are indeed beyond the usual limit. Consequently, people suffer tremendously due to exorbitant prices, and consumers can no longer afford certain ‘luxury’ items or, even worse, struggle to acquire essential items (especially food), such as fresh produce, meat, and dairy, which is harrowing indeed.



Romania Inflation in May 2022

On another note, due to previous interest rate cuts, the unemployment rate decreased by 1.4%, to 5.2% [9] (the last published recording) in July 2022 (explanation: interest rates and unemployment are inversely correlated because lower rates prompt businesses to invest/borrow more as a response to increased consumption, thereby hiring more staff and decreasing unemployment). However, it is still higher than pre-pandemic levels (4% in 2019 [10]) but the same as 2017 [11] recordings.


Nonetheless, high inflation and decreasing yet arguably high unemployment do not mix well, as they give birth to the much-dreaded phenomenon of “stagflation”: a period of excessive inflation during which the economy stagnates. There is one choice left after “heating” the economy: “cooling it down”. Subsequently, the government reduced its expenditure [12] (no more pandemic, no more staggering healthcare spending), and BNR increased13 interest rates to encourage people to save money and stop borrowing as much (explanation: higher yields on bank deposits lead to higher savings rates). In essence, the Romanian government, alongside the central bank, tried to cool down the economy. Now, inflation is slowly stabilising and will soon begin decreasing (as of July 2022, the inflation rate declined by ~0.1% to 14.96% when compared to 15.05% in June); [14] however, it is a matter of months or even years until the Romanian economy can reach the ‘golden’ 2% inflation rate.



Until then, the best thing we can do is purchase goods mindfully, without going overboard, and invest in one of the most profitable (and inflation-proof!) assets out there: ourselves. Although prices are at an all-time high and unemployment is elevated, albeit slowly declining, individuals can always invest in themselves, regardless of economic outcomes. We can later reap the benefits and collect our well-deserved ‘dividends’ due to said investments. Therefore, there is nothing to lose. Find a captivating, beneficial book and begin ‘investing’ starting today.



Bibliography


1. Ellyatt, H., ‘From soaring food prices to social unrest, the fallout from the Russia-Ukraine war could be immense’, CNBC [website], 21 April 2022, World Economy Section, <https://www.cnbc.com/2022/04/21/from-food-to-inflation-the-russia-ukraine-war-has-a-global-impact.html>, accessed 9 September 2022.


2. Trading Economics, ‘Romania Unemployment Rate’, Trading Economics [website], 2022, <https://tradingeconomics.com/romania/unemployment-rate>, accessed 9 September 2022.


3. Trading Economics, ‘Romania GDP Growth Rate’, Trading Economics [website], 2022, <https://tradingeconomics.com/romania/gdp-growth>, accessed 9 September 2022.


4. Romania Insider, ‘Romania’s central bank cuts monetary policy rate to help economy face Covid-19 crisis’, Romania Insider [website], 23 March 2020, <https://www.romania-insider.com/bnr-monetary-policy-rate-coronavirus>, accessed 9 September 2022.


5. Josephs, J., ‘Ukraine war to cause biggest price shock in 50 years – World Bank’, BBC News [website], 26 April 2022, <https://www.bbc.com/news/business-61235528>, accessed 9 September 2022.


6. Trading Economics, ‘EU Natural Gas’, Trading Economics [website], 2022, <https://tradingeconomics.com/commodity/eu-natural-gas>, accessed 9 September 2022.


7. Trading Economics, ‘Brent crude oil’, Trading Economics [website], 2022, <https://tradingeconomics.com/commodity/brent-crude-oil>, accessed 9 September 2022.


8. Trading Economics, ‘Romania Inflation Rate’, Trading Economics [website], 2022, <https://tradingeconomics.com/romania/inflation-cpi>, accessed 9 September 2022.


9. Trading Economics, ‘Romania Unemployment Rate’, op. cit.


10. Ibid.


11. Ibid.


12. Trading Economics, ‘Romania Government Spending’, Trading Economics [website], 2022, <https://tradingeconomics.com/romania/government-spending>, accessed 9 September 2022.

13. Trading Economics, ‘Romania Interest Rate’, Trading Economics [website], 2022, <https://tradingeconomics.com/romania/interest-rate>, accessed 9 September 2022.


14. Ibid.

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