What Is the Relation Between Soaring Inflation and Lockdowns? Here Are Some Stats.
First a disclaimer (and as you probably noticed from my other articles, I love to start with a disclaimer. It levels expectations and doesn’t let anyone down) about the subject of “did lockdown cause inflation”:
- This is not an article about how efficient the lockdowns were in terms of reducing the number of victims from the pandemic.
- This is not an article about healthcare. I am not a doctor, but just a dropout from an economics college degree program.
- This is also not an article to blame anyone (although you are free to blame anyone you want in the comment section. As a matter of fact, I will be excited to read any rant).
Now that I used the Via Negativa (thanks Taleb) and defined what this article is not about, it’s time to explain what I tried to do here.
I took the numbers of inflation and the stringency index (a measure of how countries enforced restrictions and lockdowns during the COVID19 pandemic) from 28 countries.
Then, I used a statistical tool called correlation to see if there was any (you guess…) correlation between them, to check in which dimension, and if did lockdown cause inflation.
While a positive correlation shows that two (or more) variables move in coordination with one another, it does not always indicate a relationship of cause or consequence.
For example, there is a highly positive correlation between the amount of oil imported by the US and the consumption of chicken meat by the US population. Both increased and decreased together for years. Does it mean that importing more oil barrels makes people visit KFC more frequently? No, although the variations of both may have a common cause (both increase during periods of economic growth, and decrease during crises).
CPI and Stringency Index: What they are?
So, I looked into the CPI for the second quarter of 2022 and the Stringency Index to see if they are related or, in other words, if a change in one could cause a change in the other.
What is the CPI
The Consumer Price Index (CPI) is a way to measure how fast prices are going up. It is the change in the prices of a basket of goods and services that a certain group of households usually buys. Inflation is measured by the rate of growth each year. A consumer price index is made up of a set of summaries that show how the prices of a set of consumer goods and services that the reference population buys change proportionally from one time period to the next.
The CPI is calculated independently for each country, and the numbers I used are from the OECD (meaning that they don’t include every country in the world, but only those related in one way or another to the OECD).
When you hear that inflation is soaring everywhere in the world (which is true and should not be a surprise to anyone, as I explained here), it means that the CPI numbers are getting bigger and bigger.
Since the CPI includes a wide range of goods, such as food, clothes, electronics, and houses, it doesn’t always show how much we spend on our own needs. For example, a family whose biggest expense is food might think that the CPI is wrong because food prices are going up much faster, as I discovered here.
What is the Stringency Index?
The Stringency Index was calculated from the beginning of the COVID-19 pandemic by the Oxford Coronavirus Government Response Tracker (OxCGRT) project.
It is a composite measurement of nine response measures used by national governments worldwide to combat the spread of the coronavirus disease.
When making the Stringency Index, the following nine factors were taken into account: closures of public transportation, orders to stay home, public awareness campaigns, restrictions on movement within the country, cancellations of public events, closures of schools and workplaces, and controls on international travel.
The index is determined by taking the average of the nine metrics, each of which has a value between 0 and 100. A score of 0 means that nothing was done about the Coronavirus pandemic during that month. A score of 100, on the other hand, means that there was a complete lockdown during that month, with no transit allowed even in special cases.
What’s the correlation between 2022 inflation and 2020 Covid restrictions?
Considering 28 countries from Europe, South America, North America, and Oceania (Asia and Africa are not present due to lack of data from one of the two sources), the correlation between the current inflation and the measures taken against COVID during the year of 2020 is 0.51.
This number varies between -1 and 1, where -1 is a perfect negative correlation (for every 1 unit of increase in X, 1 unit of decrease in Y), while 1 is a perfect positive correlation (for every 1 unit of increase in X, 1 unit of increase in Y). 0 means no correlation at all.
So, does the number 0.51 indicate a strong correlation between the 2020 Lockdowns and the 2022 inflationary explosion?
The image below gives us a good idea of what 0.51 means. It is a moderately positive correlation.
Inflation and lockdowns: Interesting findings
|Country||INDICATOR||TIME||Inflation (%)||Stringency Index 2020|
- Argentina had the world’s longest and most severe lockdown. It had not only the most severe anti-COVID measure among the 28 countries researched but also on the entire planet. Coincidentally (or not), it also has the highest inflation on our list.
- Brazil, Chile, Spain, and Colombia also had strict state-imposed lockdowns and measures against circulation during several months of 2020, and all of them have very large stringency indexes. At the same time, all of them have very high inflation.
- 3 of the 4 countries with the lowest inflation numbers (Finland, Norway, and Switzerland) also had relatively mild and loosened anti-covid restrictions.
So, am I telling you that lockdowns are the only cause of current inflation?
Not really. The numbers above show that there is a considerable, but not absolute, relation between restrictive measures during the pandemic and inflation in 2022.
There are other reasons that cause inflation. If we take an isolated country like Argentina, one could blame multiple things, like constant economic turmoil and political instability.
However, when we consider multiple countries, from multiple continents, the severity of lockdowns during 2020, and how bad inflation is during 2022, there is a considerable correlation that should raise eyebrows.
But how Did Lockdown Cause Inflation in 2022?
Inflation happens mainly for two main reasons:
- Shortage of production: with the same amount of money in an economy but with fewer goods being produced, these goods become more expensive.
- Money being thrown into the economy: when the government prints much more money or adopts an expansive monetary policy without increasing production. In this situation, you have more money in the economy for the same amount of production, so the goods also become more expensive.
So which of these 2 triggers for inflation were pushed by long lockdowns?
The restrictions for circulation obviously reduced the production and damaged supply chains, closing ports, cancelling shipments, delaying the deliveries of raw materials. One thing is to send a stockbroker to work from home, but if you send a worker from a fertilizer factory to work from home, there will be less fertilizers being produced (and later on, less crops).
But also, besides harming production, the restrictions pushed governments to create financial stimulus so people would remain at home.
The USA alone spent more money fighting COVID than during the entire World War II. With stimulus checks alone, the US government has spent almost $400 billion.
Already in July of 2021 I alerted that all this money would increase the velocity of money (a financial term better explained here) drastically and cause an inflationary boom.
Lockdowns explain inflation better than the War in Ukraine.
There is an increasing trend of blaming the inflationary boom on the war in Ukraine.
The war is a very unwanted event (and I say that as someone who lives nearby, where the government distributed survival manuals in case of invasion).
But the war does not explains the skyrocketing prices(unless in very particular cases like this one) because they were already soaring before it even started. Check the chart below.
What caused the 2022 Inflationary Wave besides Lockdowns?
Since I am in no way saying that the lockdowns and restrictions put in place during 2020 are the only reason prices are going up, what else could be to blame?
- Some countries created more stimulus under the excuse of fighting inflation. That does not make sense at all, and it is the equivalent of trying to extinguish a fire using gasoline.It is among the 5 most stupid things politicians said to curb the inflationary catastrophe.
- Climate disturbances in places like India and the American Midwest are reducing agricultural output.
- Increasing energy prices, partially due to the war in Ukraine.
- A supply chain chaos resulted from China’s Strict Zero-COVID Policy.
Is there any painless solution for this economical catastrophe?
Short answer: No. There is no painless solution. During 2020, many people repeated the motto “let’s do whatever is needed now, later we can take care of the economy.”
Later arrived, and it will bring either:
- People’s life savings being wiped out (since inflation means that money loses value and people can buy less) or,
- Massive job losses, mortgage defaults, and economic depression if the government decides to stop inflation by drastically hiking interest rates.
There is even a significant chance that the future will bring us both.
But since I don’t like to end my articles on a bad note, here is a piece of good news: while, on a macro level, the damage is done and any attempt to solve this will be very painful, we can protect and prepare ourselves individually.
I have been writing about this inflationary wave for more than a year already (I don’t have a crystal ball, just common sense and a grasp of how real-world economies work), so here are some pieces that will be really helpful to you for the next few months (and likely the entire 2023):
- In 2021, I wrote this article about 4 industrial sectors that may benefit from the incoming (now current) inflation spike. It is still valid.
- Also in 2021, I wrote this short manual on how to benefit from the next year’s (2022) inflationary boom.
- Here is what you can expect for the next 12 months, from the second semester of 2022 until the middle of 2023. Read it, save it, and one year from now, tell me if I was right or not.
- Here is a practical guide to surviving the mega inflationary wave, with advice from Argentinians, Brazilians, Poles, and others who have experienced life under out-of-control inflation firsthand.
Good luck, and good reading.
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