Economic Chronicle – Will you pick up some inflation?
– Will you be getting some inflation back?
Inflation is a funny animal. In low doses, it has all the merits: it anesthetizes the saver, stimulates consumption and painlessly reduces public debt – reasons why, moreover, central banks have made it their common goal. In large doses, however, it destroys economies and undermines currencies, and these same central banks flee it like the plague by massively raising their interest rates if necessary, at the risk of sinking the economy and spreading unemployment.
It is therefore more important than ever to determine whether the sudden and marked rise in price indices in the United States (+ 5.4% in one year at the end of June) and to a lesser extent for the OECD as a whole (+ 3.8% at the end of May) signals the start of a prolonged period of inflation or, at most, it is a bout of fever, quite understandable in the midst of a rebound in the economy after the blockage caused by the pandemic.
The kind of rise that characterizes “real” inflation is a general and persistent rise in the level of all prices. However, this surge only affects certain categories of goods and services, energy in the lead. We are therefore apparently not in the presence of real inflation but of partial imbalances between supply and demand, which come and go from one sector to another according to the bottlenecks that form here and there, without degenerating. for the moment in this dreaded “general and lasting rise” in prices.
“Neither the Federal Reserve nor the ECB have raised eyebrows at the latest clues.”
However, the prolonged confinements have given many people the opportunity to question certain consumption habits and to consider work from a new angle. Even if it is not intended to last in the same proportions, teleworking, for example, could well become a kind of new normal and come with some consequences for the costs. And if house prices have skyrocketed, it may not only be because interest rates have fallen very low, but also because of the urge to live in larger spaces, or to just change it, created a call for air that will not, however, last forever.
So far, economists observe, inflation expectations have not risen as much as inflation itself. This habit of stability, forged by a long period of almost complete absence of price increases, offers central banks a certain latitude in the conduct of their policy by allowing them to come to terms with the current peak in price increases. Neither the Federal Reserve nor the ECB have raised eyebrows at the latest clues; the second has even relaxed, announcing itself ready to deviate slightly from the top of its target, so far limited, of 2% inflation. It is not a guarantee, but it is reassuring.