The Economist Intelligence Unit (EIU) organized a webinar last December 15th to discuss the latest results/rankings of its 2022 Worldwide Cost of Living (WCOL) report. The WCOL survey, which monitors the prices of over 200 goods and services in 172 cities worldwide, excluding war-torn Kyiv, indicated that global prices rose by 8.1% year-on-year in 2022, constituting the highest inflation rate recorded in more than 20 years.
In detail, utility and food prices increased sharply, petrol prices witnessed an eye-watering rise of 22%, while prices of recreational goods and services remained controlled with consumers mainly shifting towards the purchase of essential goods.
Speakers considered that the aggressive monetary tightening by the US federal reserve led to a strong appreciation of the US dollar against most currencies. The WCOL rankings were thus affected, given that the index compares the global prices using the US dollar.
Upasana Dutt, head of the WCOL explained that by the end of COVID-19 demand rose sharply before allowing supply chains to readjust to their pre-pandemic levels, causing an escalation of prices. China’s zero COVID policy and the subsequent disruptions to supply chains also contributed to global price increases, only to be aggravated by the Ukraine war and its repercussions on global energy prices.
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Middle East and Africa
The Middle East and Africa are still home to the cheapest cities in the world, with Tripoli and Damascus repetitively scoring at the bottom of the index, in the 171st and 172nd ranks respectively, according to EIU economics unit’ delivery manager Rishabh Upadhyay. Calculated in dollar terms, the cost of living in the aforementioned cities is low compared to most cities in the world.
He adds that the average inflation in Middle Eastern cities reached a relatively low 4.7%, due to support policies implemented by the governments in the region. Subsidies and price controls executed in the UAE, for example, prevented price hikes of many items, noting that Abu Dhabi and Dubai’s inflation levels only reached 2.1% and 3.7%, respectively. As opposed to other parts of the world, the index showed that, overall, the Middle East region was less impacted by the Ukraine war.
In terms of WCOL ranks, countries like Saudi, UAE, and Jordan moved upwards on the index, reflecting an increase in these countries’ cost of living, given that their currencies are pegged to the US dollar, clarifies Upadhyay. As per the WCOL methodology, local currency prices are converted to US dollars to calculate each city’s index, making the rankings heavily skewed by exchange rate fluctuations against the dollar. As such, any appreciation in the US dollar would exert upward cost of living pressure on the countries pegged to the greenback.
Overall, EIU’s Middle East inflation rate estimations are aligned with the International Monetary Fund (IMF)’s projections. In its latest World Economic Outlook, the IMF predicted moderate inflation rates for oil exporters in Middle Eastern countries this year. Saudi’s inflation rates are estimated to reach 3.7% in 2023, down from 7.6% in 2022. UAE and Qatar’s inflation rates are projected to reach 4.2% and 2.4% in 2023, respectively, down from 5.1% and 3.4% in the previous year.
In parallel, African cities witnessed a higher inflation rate of 7.8%, driven by currency depreciation which led to declines in their WCOL scores and ranks.
Good news in 2023?
Despite a gloomier picture in 2022, the EIU forecasts prices to ease in 2023 due to higher interest rates, implemented as part of US Central Banks’ contractionary policies, and decelerating economic activity. It expects supply-chain disruptions to alleviate as freight rates decline and demand lessens. In the event of no further war escalation in Ukraine, the EIU estimates that commodity prices for energy, food, and supplies, including metals, will significantly fall year-on-year.
As higher price levels constitute the most immediate threat to current and future standards of living by diminishing real incomes and distorting macroeconomic stability, adopting adequate fiscal policies, taking into consideration cost-of-living, energy, and food crises, has become a critical challenge for many countries.
“Monetary policy should stay the course to restore price stability, and fiscal policy should aim to alleviate the cost-of-living pressures while maintaining a sufficiently tight stance aligned with monetary policy”, recommends the IMF. “Structural reforms can further support the fight against inflation by improving productivity and easing supply constraints”, it added.
The EIU projects global inflation to decline to a still-high 6.5% from 9.4% in 2022, a relief to many households around the globe.
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