The global economy has benefitted from four decades of low inflation after high inflation dominated most of the 1970s. Today the debate on whether a return of high inflation is inevitable rages on.
Politicians and, surprisingly, central bankers sing from the same hymn sheet. After 18 months of a global economic recession, and mindful of the destructive effect of wrong policy decisions after the 2008 financial crisis, they act as cheerleaders to boost the shattered morale of COVID weary people.
While many Germans still have an almost genetic phobia of high inflation, their finance minister, Olaf Scholz, told journalists that he does not think that high inflation will be a real threat in the next decade. He argues that “growing prosperity in the world leads to demand in the former supply markets, which will ultimately have an effect. But that is a phenomenon that we will have to deal with more intensely in 10 to 15 years rather than today.”
The European Central Bank prides itself on its independence and agrees with most politicians who see no risk of high inflation erupting any time soon. François Villeroy de Galhau, governor of the Bank of France and member of the Governing Board of the ECB, says: ”Today there is no risk of a return of lasting inflation in the euro area, and so there is no doubt that the ECB’s monetary policy will remain very accommodating for a long time. I want to say that very clearly.”
Many economists also believe that the risks of high inflation for a sustained period is unlikely because millions of people who lost their jobs have yet to become economically active again.
But some market observers fret that central bankers are so unanimous in their assessment of inflationary risks. Are politicians and central bankers frightened of disinflation and want to use signalling to boost confidence, investment and ultimately inflation?
The arguments that lead to the inevitability of high inflation are supported by market developments that reflect the sentiment of business leaders. Economies are fast reopening, demand for goods and services is rebounding with a vengeance spurred by low interest rates, government stimulus and consumers flush with savings.
Huge implications for workers, investors, companies and governments
Businesses are furiously trying to restock inventories following months of a collapse in demand. This, in turn, is causing supply chain disruptions.
China, the world’s leading producer of manufactured goods, has seen costs of production surging at an unprecedented level. A shortage of shipping containers and bottlenecks at many ports has made matters worse, increasing the cost of moving products worldwide.
No one knows how sustained this surge in demand will be. The likely more substantial involvement of the public sector in national economies to boost investment in the infrastructure, improve public health services and target more investment in the green economy will undoubtedly increase inflationary pressures in the long term.
A new era of high inflation will have huge implications for workers, investors, companies and governments. The price of crude oil that fell to a low of $20 barrel just a year ago is now hovering around the $70 level. Industrial raw materials and food commodity prices are shooting up as demand outstrips supply. The shortage of microchips, the Suez Canal blockage, drought in South America, a deep freeze in Texas, and the Colonial pipeline ransomware attack show how unpredictable events can add pressure on consumer prices.
Logistics and labour costs have increased, and a shortage of workers in some industries, like tourism, could intensify pressure on companies to raise wages even further. US President Joe Biden, who may not present himself for re-election in 2024, spoke candidly when he made a speech in Cleveland, Ohio: “When it comes to the economy we are building, rising wages aren’t a bug, they are a feature.”
There is no doubt that inflation expectations among businesses and consumers are rising. If businesses and consumers think that higher prices are here to stay, they might change their behaviours in ways that could cause price pressures to persist. Workers might demand higher wages, forcing companies to increase the price of their goods and services.
I subscribe to the minority view that fears the risks of high inflation. This view is well articulated in a research note by Deutsche Bank economists. They argue that “neglecting inflation leaves global economies sitting on a time bomb. If central banks wait too long to raise interest rates, they will be forced into ‘abrupt’ policy changes, causing significant disruption to markets and the economy”.
johncassarwhite@yahoo.com