Opinion – Samuel Pessôa: Inflation is a phenomenon that spreads around the world


In the pandemic, we were all locked up at home for nearly 18 months. Closed at home, we consume far fewer services—restaurants, theater and cinemas, sporting events, tourism, etc. Closed at home, our demand for goods went up a lot. I dealt with this topic in the May 8 column.

This recovery of the world economy, with a very unbalanced demand for goods, generated a strong increase in the production of durable consumer goods, whose manufacturing is intensive in chips, energy, metallic raw materials and international trade.

Excess consumption of durable goods led to a sudden drop in inventories as of the third quarter of 2020. The response of producers to the fall in inventories was an anticipation of orders. Producers in the various links of the production chains defensively anticipated orders, which caused disorganization in production.

This disruptive defensive behavior of production chains is known in the literature of bullwhip effect.

Thus, the pattern of economic recovery since the second half of 2020 has caused strong inflation in industrial goods. In Brazil, for example, industrial goods inflation, according to the November inflation preview, the IPCA-15, was 11% from January to November 2021, compared to 2% for the same period in 2020.

This more intense inflation in Brazil is also a phenomenon that has spread around the world. In the United States, in October, consumer inflation accumulated in 12 months was 6.2%.

What worries us is that this time core inflation is very sensitive to price shocks. Inflation cores are indices derived from the official index, built with the objective of giving more weight to prices that are less sensitive to shocks and whose behavior responds to the cyclical situation of the economy, that is, if there is excess or lack of demand.

The various inflation cores in the United States rotated in October, in 12 months, at 4.5%, 4.1% and 3.1%. They are, respectively, the cores by exclusion, trimmed means and the median.

The big question today is the behavior of the cores when there is a reversal of price shocks, which should occur throughout 2022, with greater intensity in the second half of the year. It is possible that the reversal of shocks will lead to a reduction in inflation and core measures. In this case, the inflationary shock will not have increased inflationary inertia. In contrast, it is possible for price shocks to reverse and inflation not to fall.

It is possible that inflation will run at a new higher level. In this case, the American Central Bank will have to act more intensely to combat greater inflationary inertia. This question will be resolved in the next six months.

The channel that will transform the price shock into higher levels of inflationary inertia will be given by the behavior of the labor market. Will we have a pass-through of the inflationary shock to wages and, consequently, will the United States experience an inflationary spiral? We do not know. So far, there are no clear signs of this phenomenon.

Europe, which seemed immune to the inflationary acceleration caused by Covid’s shocks, has experienced a significant increase in inflation in recent months. In the euro zone, inflation in 12 months, which until a few months ago was below 2%, reached 4% in October, and the core by exclusion, which was no more than 1%, in three months reached 2%.

Let’s wait for the next chapters.


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