The world has barely recovered from the inflationary shocks of the COVID-19 pandemic and the Russia-Ukraine war, yet the ongoing U.S.-Israeli war on Iran is creating the conditions for another global surge in prices. Disruptions to energy supplies and shipping through the Strait of Hormuz, the Red Sea and Bab al-Mandab are already raising transport, insurance and commodity costs, pressures that are likely to spread gradually to food, goods and services worldwide.

 

A few days ago, the Managing Director of the International Monetary Fund warned that the world may be more optimistic than it should be about the scale and duration of the energy shock. The resilience of the global economy so far does not mean the danger has passed, particularly as the prices of oil, gas and petroleum products remain high and governments have less room to continue drawing on strategic reserves to compensate for supply shortages.

 

But the more important question is not simply how high inflation might rise, but who will bear its cost. Inflation is not merely an economic indicator that moves up or down; it is also a process that redistributes income and wealth within societies. When the prices of food, energy, housing and transport increase, the burden is not shared equally. Poor and middle-income households spend most of their earnings on these basic needs, meaning that any increase in their prices directly erodes their ability to maintain a decent standard of living.

 

Higher-income and wealthier groups, by contrast, are better able to absorb rising prices. Many also own property, shares and other assets whose value may increase during periods of inflation. In practice, therefore, inflation can operate as an undeclared mechanism for transferring part of income and wealth away from those who depend on wages and fixed incomes towards those who are better able to protect their assets.

 

This means that if new waves of inflation persist, they are likely to deepen social disparities and economic inequality around the world. Wages generally do not rise as quickly as prices, causing their real value to decline.

Pensioners and people on limited incomes are particularly vulnerable to this loss of purchasing power, while tens of millions of households worldwide may be forced to cut spending on food, healthcare or education simply to cover their most basic expenses.

 

The picture is even harsher in countries of the Global South, many of which import a large share of their energy and food needs while simultaneously struggling with high debt levels and weak social protection systems. As debt-servicing costs rise, governments have less fiscal space to expand social spending precisely when their citizens need such support the most.

 

Tackling inflation by raising interest rates also carries significant social costs. Higher interest rates increase borrowing costs for households and businesses, weaken investment and economic growth, and limit job creation. Large sections of the global population may therefore find themselves facing a difficult combination: higher prices, lower real wages, more expensive credit and weaker employment prospects.

 

Even more importantly, a later decline in inflation does not mean that prices will return to their previous levels. When inflation falls, prices are generally still rising, only at a slower pace. Economic indicators may therefore improve while people continue to struggle with persistently high living costs.

 

For this reason, the coming waves of inflation should not be treated as an issue for central banks alone, to be addressed solely through conventional monetary policy tools. At its core, inflation is a question of social justice and the distribution of income and wealth. Addressing it therefore requires, alongside appropriate monetary policies, measures to protect real wages, expand social protection, safeguard spending on healthcare and education, and build fairer tax systems.