“Inflation is when you pay $15 for the $10 haircut you used to get for $5 when you had hair”. -Sam Ewing

Although, the year 2022 was thought to be a recovery year for the industries, economies and individuals but the rising global inflation has escalated the amendments of monetary policies and has also backpedaled the growth of supply chain.

Inflation rates of G20 nations:

A recent event in Indonesia banning exports of Palm Oil has added more fuel to the fire amid the skyrocketing commodity prices caused due to Russia-Ukraine war. The decision on the ban arose due to scarcity of the oil and to bring down the prices domestically. Indonesia and Malaysia are the largest palm oil producers globally accounting to 90% of the production. More than 8 MT (63%) of palm oil are exported to India every year which makes India the world’s largest importer. A ban by Indonesia has heated up the edible oil market by an increase of 5% on palm oil and are now solely dependent on Malaysia for further procurements. The palm oil industry is however mostly criticized for unfeasible practices resulting in deforestation and corrupt labor operations. Indonesia has become the world’s 3^rd largest emitter of greenhouse gasses due to high rate of deforestation.

Palm oil and its cognate are used in cooking and production of daily consumption products such as soaps, shampoos, biscuits & cakes, chocolates, cosmetics, and other processed foods manufactured by the FMCG companies. Major FMCG company such as Hindustan Unilever Limited has increased prices of its products at the range of 2%-15%. Alongside, Dabur & Marico are too expecting their financial margins to be impacted in the next quarters due to slow moving demand and high inflation. A sudden hike in the oil prices has also raised concerns on the requirement of working capital for the oil refiners who are holding less inventories in expectation of price drop. Low water levels and drought in Brazil, Argentina and Paraguay has tightened the supplies of soybean resulting in 2 decades higher prices and imports of sunflower oil has been disrupted due to ongoing Ukraine-Russia War.

The above table shows the average retail prices of essential commodities comparing prices as on current date, a week back, a month back and a year back. These challenges are to be borne not only by the producers but also by the end users in terms of costly commodities. And like Indians, billions of people worldwide with at least a small quantity of financial security, inflation has dominantly impacted their outlook.

The Fed Reserve on 4th May hiked the interest rates by 50 bps to combat the rising inflation. It also announced to shrink asset portfolio worth US$ 9 trillion making the most aggressive move since 2000 “Inflation is very high and we are moving with speed and efficiency to lower it down understanding the hardships caused by high prices” said Jerome Powell, Fed Chair. It is expected that Fed in the next meetings shall also decide in hiking the rate by more 50 bps. Post the decision, the next morning witnessed a volatile behavior of the stocks in the US with Dow Jones falling 980 points, S&P 500 and NASDAQ slumping around 3% and 5%. This impact also saw global sell off in the European and Asian stock markets.

Not only the US Fed Reserve but Central Banks of various countries have decided to increase the benchmark interest rates. Following the Fed, RBI hiked its Repo rate by 40 bps to 4.40% and Cash Reserve Ratio by 50 bps to 4.50%. Sensex tanked by 900 points the same day of decision following heavy sell offs. Market crash of Asian Markets such as Nikkei down by 0.13%, Shanghai Composite down by 1.84%, KOSPI down by 1.34% post decision on interest rate hikes by each central banks. Bank of England’s hike of 1% interest rates have been already warned about economic slowdown in this year.

Changes in interest rates of G20 nations:

A higher interest rate means high cost of borrowing and when borrowings are costly, businesses and industries will be highly impacted with less investment flows. The same will be picked by the financial institutions and will be passed on to the end consumers. The next few months will witness an increase in prices of essential and daily household commodities and bank loan rates such as personal, gold, car, and home loans. An increase in interest rates has also caused foreign currency to rise and depreciation in rupee making it difficult for the importers and exporters to be cost efficient on every penny they spend or earn for a single trade.

References:

https://www.news18.com/news/business/soap-shampoo-chocolate-price-hikes-is-indonesias-palm-oil-export-ban-impact-for-short-term-5093935.html

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