Since the reopening of national economies after COVID-19 lockdowns, inflation has been rising around the world. This change in the macroeconomic environment caught policymakers off guard in terms of adapting inflation forecasting models and assessing the causes of this evolution. As a result, old debates have resurfaced about the risks and opportunities of inflation and how best to restore price stability.
Despite the rapid surge, inflation was not totally unexpected since it is partially attributable to measures taken to reopen national economies, resulting in increased demand and disruptions of supply chains and production, says Archana Sinha, the head of the Department of Women’s Studies at the Indian Social Institute. In this sense, the current inflationary environment differs from the one in the late 1970s and may prove only transitory.
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There are, however, other drivers of inflation that may prove more long-lasting. This includes, as Domingo Sugranyes of the Pablo VI Foundation points out, decarbonization and economic concentration, allowing excessive pricing power. Additional factors are rising property and stock prices, as well as the increase of raw material prices, Etienne Perrot explains.
As a result, as Valerio Bruno mentions, central banks’ instruments, such as raising interest rates, may not suffice to reverse current inflationary pressures. Bruno, a researcher, says that we can “expect a long period of high inflation.” That being said, it is far from certain that central banks are willing to use these instruments because of their concern with financial stability that a selloff on financial markets may jeopardize.
From a socioeconomic perspective, Andrew Cornford recalls that inflation is not a “uniform problem” since its effects vary among countries, sectors and groups. The main problem, Bruno points out, is that “the wages of workers, in particular the middle class, suffer greatly from a declining purchasing power. If wages are not adjusted to inflation, consumptions and companies’ profits are affected, leading to a possible economic recession.”
On the other hand, inflation may benefit debtors by depreciating their debts. However, Cedric Tille, a professor in macroeconomics, warns that “any persistent inflation will raise the cost of additional borrowing” in the future and therefore “any gain from inflation for some actors is likely to be temporary.” For instance, Sugranyes says, “many weaker debtors will find growing difficulty in refinancing at higher interest rates.”
The current rise of inflation pressure may prove to be only temporary — not inflation in the pure sense — but it has to be taken seriously because it could dash hopes of economic recovery and weigh on the morale of populations exhausted by waves of social restrictions.
By Virgile Perret and Paul Dembinski
Note: From Virus to Vitamin invites experts to comment on issues relevant to finance and the economy in relation to society, ethics and the environment. Below, you will find views from a variety of perspectives, practical experiences and academic disciplines. The topic of this discussion is: What are the main threats, but also possibly the main opportunities, related to inflation?
“… inflation is not new … ”
“Inflation is not new; it was hidden behind rising property and stock prices, leading to properties disparities. As international competition has diminished, the rise in energy and raw material prices has a direct impact on consumer goods. Its social effects (on pensioners and various marginal groups), as well as its economic consequences for long-term investments (distortions) and interest rates (rise), must be taken into account. On the other hand, inflation favors, for a time, companies, indebted households and massively borrowing states. Debtors become more credible in financing the investments needed for the ecological transition”
Etienne Perrot — Jesuit, economist and editorial board member of the Choisir magazine (Geneva) and adviser to the journal Etudes (Paris)
“… any gain from inflation for some actors is likely to be temporary … ”
“While inflation has a short-run benefit for debtors, one must bear in mind that these debtors will borrow additional amounts in the future. Any persistent inflation will raise the cost of these additional borrowing, including a term premium. Therefore, any gain from inflation for some actors is likely to be temporary. Looking through the inflation movements of the coming months, which hopefully will prove temporary, the reasons underpinning central banks’ mandates of symmetric price stability remain as valid as they have ever been.”
Cedric Tille — professor of macroeconomics at the Graduate Institute of International and Development Studies in Geneva
“… inflation does not entail any real benefit …”
“Inflation does not entail any real benefit for most governments and businesses. Although debts may be depreciated in the long term, many weaker debtors will find growing difficulty in refinancing at higher interest rates and will see financial flows fleeing toward ‘safer’ harbors. There are objective reasons for cost increase, like decarbonization or restructuring of supply chains, which should lead us to admit that we are slightly poorer than we thought. Concentration also may allow business excessive pricing power. The vicious circle of inflation is an illusionary way of denying these facts, leading to even worse impoverishment. Some governments may be tempted to print money, [but] there will be growing pressure for automatic indexation of salaries and pensions. Difficult challenges!”
Domingo Sugranyes — director of a seminar on ethics and technology at Pablo VI Foundation, former executive vice-chairman of MAPFRE international insurance group
“… policy responses must address distributional dimensions … ”
“Inflation is not a uniform problem. It varies among countries (high, middle and low-income), among income groups within countries, among goods and thus producing sectors (e.g., energy and primary commodities used for food), and amongst services (e.g., health-related, finance and travel). As is generally acknowledged, policy responses — both national and those involving international finance and aid — must address distributional dimensions, avoiding links to austerity and other attached conditions likely to increase poverty. In developed countries, policy design will frequently be handicapped by a lack of pertinent data, especially regarding wealth in the form of financial assets and tax liabilities. An option here would be a once-and-for-all capital levy high enough to help a government to deal with immediate increases in its financial liabilities, while leaving permanent solutions to the problem of enormous inequalities of wealth to be attained as part of a future response to longer-term needs and objectives.”
Andrew Cornford — counselor at Observatoire de la Finance, former staff member of the United Nations Conference on Trade and Development (UNCTAD), with special responsibility for financial regulation and international trade in financial services
“… the risks of inflation far outweigh the possible benefits … ”
“It seems to me that the risks of inflation far outweigh the possible benefits. To make effective use of the tools available to central banks, it would be necessary to understand the real causes of inflation (a ‘drugged’ financial economy, monopolies and oligopolies, or the costs of raw materials). Unfortunately, central banks’ instruments, such as raising interest rates, are not always sufficient to reverse this trend. We can therefore expect a long period of high inflation, with ‘classic’ safe-haven assets as gold reaching historic highs. The main problem with inflation is that the wages of workers, in particular the middle class, suffer greatly from a declining purchasing power. If wages are not adjusted to inflation, consumptions and companies’ profits companies are affected, leading to a possible economic recession.”
Valerio Bruno — researcher in politics
“… inflation at these levels is a cause for concern …”
“Labor market conditions are improving but tempestuous, and the pandemic continues to threaten life and economic activity. The rapid reopening of the economy has brought a sharp advance in inflation. These are challenging times for the public. The dynamics of inflation are complex, and inflation can be assessed from a number of diverse perspectives, including the absence of inflation pressures; moderating inflation in high inflation items; wages; and long-term inflation expectations. Businesses and consumers widely report upward pressure on prices and wages. Inflation at these levels is a cause for concern. This assessment is a critical and ongoing one as we continue to monitor inflation data against each of these perspectives.
Archana Sinha — head of the Department of Women’s Studies at the Indian Social Institute in New Delhi, India
*[An earlier version of this article was published by From Virus to Vitamin.
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.
