Inflation is now on the front page of newspapers around the world, and for good reason. Prices of more and more goods and services are increasing in a manner not seen for decades.
This inflationary spike, accompanied by actual and feared supply shortages, is fuelling both consumer and producer anxiety. By also threatening to worsen inequality and derail a much-needed sustained and inclusive economic recovery from the Covid-19 pandemic, it is also becoming a hot political issue.
For their part, policymakers at central banks in the United Kingdom and the United States have started to move away from the narrative of “transitory” inflation.
But the pivot is far from complete and not nearly quick enough, particularly at the US Federal Reserve, the world’s most powerful and systemically important monetary institution. Delays in Congress approving measures to increase productivity and enhance labour-force participation are not helping, either.
The reasons for the rise in inflation are well-known. Buoyant demand is encountering inadequate supply — a result of disrupted transportation and supply chains, labour shortages, and an energy squeeze.
While notable, this price surge does not herald a return to a 1970s scenario of double-digit inflation rates. Rigid cost-price indexing is rarer these days. Initial conditions regarding the formation of inflationary expectations are a lot less unstable. And central banks’ credibility is much higher, although it is currently facing its severest test in decades.
But inflation will nonetheless be much more pronounced than top Fed officials had thought when they repeatedly dismissed increasing price pressures as a temporary phenomenon. Even today, their inflation forecasts — despite having been revised up several times already — still underestimate what lies ahead.
Survey-based inflation expectations compiled by the New York Federal Reserve have risen above 4 per cent on both a one- and three-year time horizon. Knock-on cost-push inflation tendencies are broadening. Quit rates among US workers are at record highs as employees feel more comfortable leaving their jobs to seek better-paying positions or strike a better work-life balance.
There is more talk of labour strikes. And all of this is exacerbated by consumers and firms bringing forward future demand, mainly in response to concerns about product shortages and rising prices.
The current bout of inflation is part of a general structural change in the global macroeconomic paradigm. We have gone from a situation of deficient aggregate demand to one in which demand is fine overall. Notably, US retail sales increased by a higher-than-expected 13.9 per cent year on year in September, indicating that there are still quite a few pockets of pent-up purchasing power being translateda into effective demand.
Of course, this is not to say that there are no issues regarding the composition of demand that must be addressed. Inequality, not just of income and wealth but also of opportunity, remains an urgent concern.
Copyright: Project
Syndicate, 2021
