Inflation is a real problem here

The pain that Dutch households feel due to the decline in purchasing power pales in comparison to the impact of high inflation on daily life in Argentina and Turkey. The problems in those countries cannot be viewed in isolation from the ever-increasing dollar.

The Dutch cabinet is under increasing pressure to compensate households for the enormous increase in the price of natural gas. Together with higher food prices, this is an important reason why inflation has risen to more than 10%. The depreciation of the euro against the dollar also plays a role. In global markets, commodities and many other things are traded in US currency. Since the dollar has risen by 14% against the euro since the turn of the year, all kinds of imported products have also become a lot more expensive. In some other countries, however, this effect is much stronger.

Everything on installment
The Turkish lira has fallen 27% against the dollar this year. For the Argentine peso, that loss is slightly smaller: -25%. In both countries, the fall in prices further fuels the already high inflation. In Argentina inflation rose to more than 70% last month. The country has been struggling for years with sky-high inflation, which the population is dealing with creatively. For the middle class, for example, it is a sport to buy as many things as possible on credit. Due to the rapid decline in value, the most expensive 1.000 peso note is now worth only €8. So if you go out for a luxury meal or do your shopping, you have to carry around a whole pile of banknotes. Almost all major purchases, such as houses, are already settled in dollars.

80 percent inflation
In an effort to control inflation, the Argentine central bank raised interest rates from 60% to 69,5% in mid-August. That, however, is mop with the tap open as long as the country does not get the budget in order. In the run-up to the presidential election in 2023, President Alberto Ángel Fernández is unlikely to take any harsh measures. The Turkish Central Bank (CBRT) is taking a completely different approach in the fight against inflation that has risen to more than 80%, according to official figures. Actual inflation may be much higher, but the CBRT recently cut interest rates from 14% to 13%. The notable move came under pressure from President Recep Tayyip Erdoğan, who believes the weak economy is a bigger problem for Turkey than hyperinflation.

New debt crisis?
In addition to extremely high inflation, the strong dollar is also causing other problems in the emerging world. In order to arouse more interest among foreign investors, many countries and also companies have issued loans in dollars. The appreciation of the US currency makes the interest payments and repayments on those loans a lot more expensive. The accumulation of dangerous factors earlier this year already prompted the World Bank to warn of a new debt crisis. Many countries in Latin America and Africa are at risk of experiencing payment difficulties in the coming quarters. And which currency will have the wind at its back as tensions flare up in the financial world? You guessed it: the dollar.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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