Inflation within G20 countries: facts, causes and consequences

Rising inflation within G20 countries has been a cause for concern over the past few months. G20 countries have had to deal with challenges when faced with rising inflation, attempting to implement various measures. Inflation has also contributed towards creating stagflation for global economies. With slower economic growth, governments and central banks need to find ways to stop inflation rising even higher.

Within this article, we will be looking at how countries within the G20 are dealing with inflation.

What countries are in the G20 and why does it matter?

The G20 comprises 19 countries with some of the world’s largest economies. The G20 is a strategic multilateral platform connecting the world’s major developed and emerging economies. Together, the G20 members represent more than 80 percent of world GDP, 75 percent of international trade and 60 percent of the world population. The G20 includes Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, the United States and the European Union. Additionally, Spain is a permanent guest but doesn’t have a formal membership within the G20.

Formed in 1999 as a meeting for the finance minister and central bank governors, the G20 has evolved into a yearly summit involving the Head of State and Government. The role of these meetings is to discuss ways of securing future global economic growth and prosperity. Since each country has its own unique challenges and opportunities within the G20, seeing where there is potential synergy between nations is a good step forward.

For many of the countries within the G20, inflation wouldn’t have seen a significant increase until 2021. Prior to the Ukraine-Russia conflict, the economic impact of Covid-19 was felt by nations internationally. Covid-19 was a major contributor to the economic downturn of major economies over the past several years. Nonetheless, the recent rise in inflation has been due to several other factors.

What are the major factors contributing to inflation for G20 countries?

Energy and fuel shortages

The shortages of energy and fuel have had a significant impact on inflation. Many of the countries within the G20 are still currently being hit by shortages of energy and fuel. Gas and electricity companies responded by increasing prices due to limited supply. As a result, petrol prices have been an ongoing concern for consumers over recent months.

According to globalpetroprices.com which tracks average petrol prices globally, the 3 countries within the G20 with the highest petrol prices in US Dollars are the UK, Spain and France. With Europe and the UK having to deal directly with greater uncertainty and economic unrest due to the Ukraine-Russia conflict, this has caused a negative knock on effect.

Governments in countries within Europe have attempted to support households by introducing subsidies or removing charges temporarily. For instance, Germany has dropped a charge for supporting renewable energy on electric bills, saving families €300 a year. Germany is also subsidising car fuels and has introduced a monthly €9 ticket for using public transport in June that you can renew in July and August.

Currency fluctuations

Major currencies have seen a great deal of fluctuation and price movement over the past 6-12 months. Pound Sterling, US Dollar and the Euro in particular continue to see currency fluctuations. In May 2022, the Eurozone inflation hit its highest level since 1999, when the currency was first introduced.

Over several months there has been little confidence from analysts that the Euro will recover quickly. The fact that the Eurozone is a mixture of strong and weak economies lies at the heart of the issue here. Additionally, countries within the European Union have very different records of financial discipline, making the single currency fragile to market movements.

Inflation is impacting both consumers and businesses who are seeing their standard of living diminish and costs rise. The diminishing value of currencies including the US Dollar, Pound Sterling and Japanese Yen has been a result of rising inflation.

Economic and political uncertainty

Economic and political uncertainty has been a common theme over the past several years. Covid-19 had a major impact on global economies and caused businesses to change and adapt significantly. Inflation had increased initially as a result of the Pandemic’s impact on business and economic activity.

Nonetheless, according to the ECB , the prices of goods and services other than energy and food are currently increasing at an annual rate of 3.5%. This is more than twice as much as compared to pre-pandemic historical average figures.

Supply chain issues have also impacted international trade. Importing and exporting of goods within countries hasn’t been without its challenges. High energy costs have made it more expensive to run factories and transport goods via supply chain channels. Countries within the G20, such as the U.S and Japan import a lot of their goods from China. Since 2009, China has been the biggest exporter of goods globally . China also exports a great volume of goods to the EU, having grown to become a major international trading partner for countries globally.

What measures have governments introduced to support households?

Countries within Europe have made a conscientious effort over recent months to provide support for households . Price surges for energy bills are impacting households who are feeling the financial pinch. Initially, the UK government was reluctant to offer any financial help during the cost of living crisis, possibly due to the financial ramifications of the Eat Out To Help Out scheme . However, European counterparts such as Germany, Sweden and France provided additional support to households at the offset. Since then, the UK government introduced a energy bill discount of £400 , to help with the rising price of fuel this autumn.

Households on the lowest disposable incomes will also get a one-off payment of £650, while pensioner households will receive an extra winter fuel payment of £300. France introduced a similar form of financial support for households. 5.8 million households received a one-off €100 payment in energy vouchers. Since then, it has also reduced taxes on electricity.

In May 2022, Italy announced a €14bn fuel subsidy and investment plan. They plan to allow families to keep their fuel bills around 2021 levels, and to invest in renewable energy. Italy is also incentivising households to switch to electric vehicles and renewable sources of energy. To help pay for these measures, taxes are being raised for energy companies whose profits have gone up as a result of the higher fuel prices.

Countries within Europe are using similar strategies to provide additional support for households. It’s important nonetheless for governments to try and get the balance right. Governments alongside central banks must tread the line to ensure it’s not overly reliant on debt to stimulate economic activity.

How are central banks attempting to reignite their respective country’s economy?

Tightening monetary policy

Monetary policy is a talking point for central banks collectively around the world. Central banks have the task of combating rising inflation and stimulating growth within an economy. Currently, generally speaking central banks have reduced the money supply within economies. This in turn restricts the volume of money which banks can lend to businesses and consumers.

The Bank of England (BoE) took a conservative approach by raising interest rates by 0.25% in March, May and June 2022. European countries including Germany, Spain and Italy have dealt with decisions made via the European Central Bank (ECB). Although the ECB hesitated to increase interest rates at first, it ultimately had no choice after the eurozone inflation reached 8.1% in May.

Raising interest rates

Central banks within the G20 are opting to raise interest rates to attempt to combat inflation. Monetary policy is closely linked to interest rates. With higher prices and higher interest rates to borrow this inevitably leads to a fall in consumer spending. When demand for goods and services decreases, their price tends to decline over time. Central banks have implemented this strategy as a means to curb spending, which could lead to curb inflation.

Final thoughts

As the past few years have shown, it’s extremely difficult to predict what will happen within the global economy. Currently, inflation remains a difficult area for central banks and governments to tackle. With both external and internal factors impacting most countries around the world, planning ahead is recommended in such an uncertain economic climate.

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Read more about inflation:
What is inflation and how does it impact the economy?
How rising inflation is impacting overseas purchases
How inflation impacts import & export in the UK