Think of the unfortunate situation when the doctor comes out of the operating room and tells the family to choose between the mother or the baby. Of course, this doesn’t actually happen; the doctor always prioritizes the mother.
This is the same idea that is always put in front of any central bank that faces inflation; save the people (the mother) or save the economy (the baby).
Very quickly, inflation is when the purchasing power of the currency decreases, and the price of something – like gum for example – which used to be EGP 0.25 reaches EGP 1.
Ok, how does the analogy of the baby and the mother relate to the current economic situation? Simply put, the Central Bank, in order to combat inflation, has several weapons:
- 1- Fiscal policy, such as increasing taxes or reducing government spending, which means fewer projects and less economic growth
- 2- Increasing interest rates and this is the most important weapon used by central banks, and this is to withdraw liquidity in the market by driving people to put money in the bank and receive interest rather than invest. This decreases liquidity in the market but affects the economy as well.
On the other hand, individuals’ income does not increase and prices continue to rise. This situation drives the economy into a recession and means that the economy is not working well.
The question that comes to mind is: what is the solution to the issue?
In fact, this word has a term, which is “the spiral of wages and prices”.
There is high inflation and prices have increased >> Workers are demanding an increase in wages >> The salary is increased >> The cost of production increases to produce the same product >> prices increase and there is even higher inflation.
All this leads to one of two scenarios:
- 1- A perfect and happy scenario
Since the only goal is to save the mother (the people) and eliminate inflation, the tangible result for me is that the inflation rate is 3% – for example – instead of 22%. Our goal is to control the situation, and that gum will increase to only EGP 1.25 rather than EGP 2. In addition, some factories will fire workers and unemployment rates will increase due to different reasons such as the suspension of projects.
A summary of the happy scenario is that we will reduce inflation, but we will slightly slow down the economy in order to bring the group to safety, or we will do something called a soft decline. It will negatively affect the individual, but we will pass from the catastrophe of high inflation. - 2- Dramatic scenario
In this scenario, we are going to sacrifice the baby (the economy) and take the mother (the people) with us, a state known as stagflation. Inflation rates are increasing and economic growth is low, similar to the situation in 1965.
The question here is: is Egypt in inflation or stagflation?
To determine whether a country is experiencing stagflation, we will look at 3 things:
- 1- The prices of goods, which is measured by an index called (CPI), saw an increase from 6.26% at the beginning of January to 24.44% at the end of December, according to the CBE.
- 2- The unemployment rate jumped from 7.2 in the first quarter of 2022 to 7.4 in the last quarter of the same year, after it had decreased over the past few years.
- 3- GDP. At the end of 2022, the World Bank reduced growth expectations for Egypt from 4.8%, which was expected in October to 4.5%, and this is a large difference from the 6.6% growth that Egypt wanted to achieve.
In addition, the IMF announced that a third of economies around the world will suffer an economic recession.
We can conclude that the current situation is the beginning of stagflation…
In the end, we hope for an end to the global crisis and stability for the whole world.
This was not written by Thndr and this is not investment advice, you should do your own research before making investment decisions.
