The pandemic set the entire world economy on an unprecedented rollercoaster ride. As the world was recovering from this deadly virus, Russia’s invasion of Ukraine sent price indexes into a downward spiral and unleashed a new bout of rising inflation.
According to the UAE National Bureau of Statistics, annual inflation in the country climbed to 2.58 percent in November 2021, from 1.86 percent the previous month. It was the fourth straight month of rising inflation and the highest since September 2018.
With a debilitating pandemic, absence of food security, and a steady rise in inflation, the already beleaguered working class has been pushed farther into the abyss.
What is inflation, and how does it affect the working class?
In simple terms, inflation refers to a general increase in the prices of goods and services or a fall in the purchasing value of money. It also coincides with the devaluation of a currency over time. Rising inflation can be attributed to a number of factors within the economy. These can include a rise in production costs such as wages or steeper costs of raw materials, or an upsurge in oil prices like what we are currently witnessing in the world during the Russia-Ukraine crisis. Inflation is also caused when the demand for products and services grows disproportionately. This results in a drop in the supply and leads to goods being priced much higher than usual.
Given that Russia is the world’s top wheat supplier and Ukraine is the fifth, disruptions in grain delivery substantially influence the worldwide pricing of essential food items. This has resulted in a surge in food prices and other vital food items, such as corn and sunflower oil, imported from these two countries.
Furthermore, fuel prices have risen by 20% over the last few months, with vehicle owners expecting a double-digit hike in the upcoming months. This has sent the international economy into a nosedive. This climb in prices without any increase in salaries or other incentives has resulted in people having a more difficult time saving money.
What are the significant consequences of inflation on the working class?
Rising inflation is known among economists as the ‘Corrosion of money’. Unfortunately, it affects the working class first. A few of its major consequences are given below:
Fall in real income
Although inflation does not mean a literal drop or decrease in income, it usually rapidly lowers the “real” income that a household may be earning. This means it corrodes the actual value of that income. By default in an inflationary environment, the cost of goods and services increases which leads to lower amounts of these goods and services being purchased with the same amount of money. For example, if a family spent 500 dirhams on groceries per week, the same amount will now only cover the family’s groceries for half the week.
Related: How to manage employee benefits in times of economic recession.
Rise in food prices
Inflation increases the price of fundamental necessities such as food. As a result, people belonging to the middle and lower-middle classes have a hard time making their ends meet. With the price of food skyrocketing in the UAE and worldwide, caused by increased freight rates, rising oil prices, and the current Russia-Ukraine armed confrontation, it has been a struggle for the working class to manage their finances. This doesn’t only affect the consumption of food and nutrition in general, it also causes families to reassess their overall spending patterns. Accordingly, families have to reallocate some – or most – of their spending towards what they perceive to be essentials for the family. This sends the entire economy into a survival mode.
Hike in fuel prices
A significant increase in fuel prices is often expected to augment inflation and slow industrial prosperity. While oil prices directly influence the cost of petroleum-based commodities, they have an indirect impact on expenditures such as transportation and production.
Hence, with the recent hike in fuel prices in the UAE, people have resorted to abandoning their personal vehicles for commuting to their workplace and started opting for public transport to save cost. We are also starting to see the field staff and outdoor workforce requesting adjustments to fuel and transportation allowances to reflect the increasing cost of travel.
Negative real interest rates
People who rely on returns from their savings accounts may find themselves in a difficult situation if the interest rates are comparatively lower than the inflation rate.
Wage inflation risks
Inflation boosts demand for a compensation hike, resulting in increased labour costs and lower earnings for businesses. Hence, to counterbalance the added cost, companies tend to charge more for the products and services to retain the same level of profit margin.
A country with rising inflation rates for an extended period is likely to experience a dip in its export prices, leading to lower export orders, poorer profit margin, fewer employment opportunities, and a negative trade balance.
How to plan for the future amid rising inflation?
To counter the effects of inflation, people need to have savings as well as an investment plan.
People across the world, including the UAE, are finding ways to keep costs low. Budgeting is a good place to start. It means having a budget for everything and then sticking with it. This includes getting rid of unnecessary streaming services, eating at home, avoiding an overindulgence in shopping sprees, and more.
Amidst rising inflation, individuals investing to grow their income should look beyond the accomplishments of a company and focus on the real return, or the return net of inflation. UAE residents can also invest in equities over the long term to enjoy healthy returns that beat inflation by a wide margin or have a portfolio of investments that grows in the long run.
Adopt better salary negotiation
With the ongoing inflation, it has become even more important to know how to negotiate better salaries. When offering a job to a new candidate, 70% of hiring managers don’t expect applicants to accept the original offer. Candidates should find out if a workplace offers workplace savings plans and other financial benefits. They must also conduct market research and demonstrate their value to the organization, not settle for low-ball offers, and understand their local labor laws and the laws governing gratuity.