Opinion – Why? Economese in English: How temporary will the rise in global inflation be?

In much of the world there has been an acceleration of inflation. In October, annual headline inflation rates reached 6.2% in the United States, 4.5% in Germany, 4.4% in Canada, 4.2% in the United Kingdom and an average of 9.1% in emerging economies.

To different degrees across countries, such a rise in inflation rates has reflected an unexpectedly strong recovery in demand, particularly in the case of advanced economies that were able to resort to generous fiscal programs to support families and businesses, in a context of restricted access to cheap energy goods and inputs.

How long will such inflationary pressures persist? Will they be “transitory” or will they remain if there is no quick reaction on the part of monetary authorities? Should central banks and governments already be tightening their fiscal and monetary policies to avoid a repeat of the inflation experiences of the 1970s? Central banks in emerging economies are already raising interest rates: are the large advanced economies lagging behind in this regard?

Three types of supply shocks have been impacting the availability and price of goods. First, the bottlenecks in supply chains for products stemming from the global pandemic crisis.

After the confinements around the world, we witnessed a combination of pent-up demand and companies seeking to replenish stocks, which ended up leading to monstrous congestion on the freight transport routes.

This was aggravated by the change in the composition of demand, with intensive personal contact services being replaced by durable household goods. One expression of this was the scarcity and dispute for semiconductors among manufacturers of industrial products.

A second shock came from the prices and availability of energy and food. In October, the average price of a barrel of Brent oil hit its highest level since the same month in 2014, just before US shale oil and gas ushered in a period of much lower global prices . Low gas stocks in Europe were reflected in higher prices. Restrictions on the supply of coal in China and India led to moments of mandatory shutdowns in energy consumption – including industrial production – in some cities in China.

Food prices have also reached heights not seen since 2013. Food and energy accounted for, on average, 40% of the annual rise in headline inflation in major developed and emerging economies. In the Brazilian case, energy costs due to the hydraulic crisis and fuel prices – also pressured by the devaluation of the real – caused 50% of the rise in inflation.

The third shock came from a shrinkage in the workforce. In the United States, this has been called “the big resignation” or “dropout”: an unexpected shrinkage in the workforce due to pandemic-accelerated retirements. According to Miguel Faria e Castro of the Federal Reserve Bank of St. Louis, more than 3 million of the 5.25 million people who left the country’s workforce between the onset of the pandemic and the second quarter of 2021 retired due to covid. -19, for reasons of higher health risks for older adults or as a consequence of enrichment arising from the appreciation of financial assets that reflected monetary policy during the pandemic.

Well then. How quickly reversible will these shocks be? And what about the possibility that the mismatch between demand and supply is already reflecting an excess of the first even under conditions of normalization of the second? What variable to look at to see if “temporary” inflation will leave consequences that will demand a greater monetary tightening than that currently signaled by central banks?

Bottlenecks in value chains are projected to gradually reduce by mid-2022. In the case of energy prices, futures markets suggest moderation in the coming year. The temporary nature of the shrinking of the labor supply is the great question, as it is not clear whether it will be partially reversed as stress is reduced and working conditions improve at the end of the pandemic. It should be noted that, despite hiring difficulties in sectors directly affected by the pandemic, nominal wage increases have lagged behind inflation.

As for the aggregate demand being already excessive, opinions are divided. For example, on the “temporary inflation” side of the team, Paul Krugman, in an article published last Friday (19) in the New York Times, suggests that aggregate domestic demand in the United States is only 3.8% higher this year. that in 2019, when the replenishment of stocks by firms is subtracted, in an economy whose supply capacity under normal conditions expands at a rate of 2% per year. Speeding up a tightening of this demand –which next year will not benefit from new checks distributed to families– while supply recovers would not be appropriate.

On the side of the “permanent inflation” team due to excess demand, analysts at the Institute of International Finance (IIF) point out Switzerland, Japan, China, Malaysia, Thailand and the United Arab Emirates, where inflation remained low even though it also suffered shocks in the supply chains. value and energy costs, to suggest that rising inflation in the United States, Canada and others has been reflecting a mismatch between their aggregate domestic demand and the capacity to supply under normal conditions.

Robin Brooks of the IIF says US consumer spending has already returned to pre-pandemic levels, something that didn’t happen after the 2008-9 global financial crisis.

And the picture will still be unclear in the coming months, as the diffusion of the shocks mentioned here on other prices is still ongoing. To take an obvious example, rent values ​​remain far from reflecting the brutal rise in US home prices.

There are two key variables to pay attention to. First of all, inflation expectations by private agents. Inflation forecasts in the United States for 2022, compiled by Consensus Economics, have shown throughout this year an increase from 2% to 3.7%, slightly above the inflation that serves as an average target for the Federal Reserve.

The other variable to observe is the extent to which prices and wages start to be readjusted from the previous inflation. The combination of unanchored inflation expectations and a race between prices and wages would reveal the “transient” as having become “permanent”. Otherwise, it makes sense for the Federal Reserve and the European Central Bank not to accelerate their monetary tightening.