On Tuesday, November 23, 2021, BSI Economics organized a discussion on the topic of inflation. Is this phenomenon transitory, temporary, or, on the contrary, could it be long-lasting? If so, why, and what would be the implications in terms of economic policy?
To answer these questions, the panel brought together a chief economist from a private bank, an economist from a central bank, a strategist from a debt issuance agency, and a university professor specializing in monetary policy.
There are several reasons to believe that inflation will be temporary:
- From a historical perspective: the current situation is more similar to that of 1947, when price increases were initially the result of consumer demand exceeding supply.
- From a statistical perspective: inflation is being driven up by base effects (the reduction in VAT in Germany in 2020) but also by changes in the weightings of the baskets of goods used to calculate the consumer price index.
- From an economic perspective: the rise in energy and raw material prices comes at a time of strong economic recovery and supply chain tensions, and is affecting the production prices of goods and services and , ultimately, retail prices.
However, several factors suggest that it will be sustained:
- Inflation no longer affects only energy goods such as oil or just a handful of goods, but an increasing proportion of goods.
- The sharp rise in rents in the United States, which account for almost one-third of the US inflation index: strong demand is driving the rental market despite insufficient supply, leading to higher rents, which will automatically generate more inflation.
In any case, it is important to distinguish the situation in the United States from that in Europe:
- In the United States, the stimulus package was almost twice as large as in Europe (USD 1.9 trillion compared to USD 750 billion in Europe, or 9% of US GDP compared to 5% of European GDP). This difference is all the more significant given that half of the European stimulus package consists of loans, which is not really the case in the United States (bond issues). Inflationary pressures are therefore higher there, especially since they were already high before the crisis.
- These inflationary pressures are also being fueled by a larger exodus from the labor market by certain workers, who are still living off their savings while waiting for a job with better pay and working conditions. Under the weight of strong demand, companies that need to recruit could offer higher wages, leading to higher prices with unchanged margins.
- Finally, there has been a marked shift in the consumption of goods in the United States, where households are substituting their consumption of certain services with more goods, which means increased demand at a time when production is facing supply problems.
Added to this are many other questions
- On the one hand, central banks have an interest in maintaining a certain level of inflation in order to reduce the burden of government and corporate debt more quickly. On the other hand, they must avoid losing control of inflation to prevent it from eroding households’ purchasing power. The Federal Reserve (Fed) has embarked on a policy of tapering.
- The credibility of central banks will be closely scrutinized. Several of them, such as the FED, have chosen to tighten their monetary policy after monthsof overshooting. In Europe, the « mistake » made under J.C. Trichet’s tenure as head of the European Central Bank (ECB) still haunts people’s minds. Particular attention should be paid to Germany, where wages have risen due to an increase in the minimum wage, which may have a lasting upward impact on the price of goods throughout Europe via imported inflation .
