Inflation will probably stay with us for a long time. And this is because although a relative de-escalation is recorded in the various links of the global economy, it remains relatively slow. Indicatively in the US where the de-escalation in January compared to December was only 0.1%, less than the expectations of the market. At the same time, structural inflation in the US, i.e. that which takes shape when we exclude fuel and food, remained at high levels.
Similar elements can be seen all over the world. At the same time, the messages are contradictory in the two categories of products that contribute particularly to inflation worldwide, i.e. fuel and food. Fuel as well as overall energy costs appear to be falling and an immediate energy crisis seems to have been averted, however food inflation remains high creating a particularly difficult condition for the popular strata.
At the same time, one of the main parameters of the economic situation that points to a relative improvement in the economic situation, i.e. the creation of new jobs in economies such as the American one and the maintenance of lower unemployment rates is treated as one of the parameters that maintain inflationary pressures .
Against this background, the confrontations between the monetary “hawks” and the monetary “doves” in the Central banks are intensifying, that is, the confrontations between those who argue that significant increases in interest rates are needed and those who think that things are getting better and therefore we can limit increases.
The open discussion to understand the phenomenon
Many of the problems and signs of confusion around the subject of inflation also have to do with the difficulty of understanding the phenomenon, especially since it followed a period when inflation seemed more like a thing of the past.
Initially the spontaneous tendency was to attribute the inflationary increase that followed the pandemic to contemporaneous and “exogenous” factors. From momentary disruptions in supply chains, which limited the supply of high-demand products, we moved to the “blame” of large financial aid in the period of the pandemic which fueled an “excessive” consumption mood as soon as the restrictive measures came in, to follow the war in Ukraine and the consequent increase in energy prices.
But the very architecture of inflation, and the maintenance of relatively high structural inflation, shows that exogenous causes – mainly affecting food and drink prices – are not the only explanation.
At the same time, the return of a “monetarist” interpretation of inflation, expressed in the identification of the responsibility in the large monetary benefits that preceded it, also collides with the fact that in the very recent past we saw practices of quantitative easing coexist with deflation.
What’s missing are other dimensions of the discussion, such as how supply-side pricing decisions are made, how falling productivity growth affects pricing decisions to maintain operating margins, how it affects business decisions for pricing the pressure of shareholders and financiers for immediate performance.
How does employment come into the equation?
This inability to have a more comprehensive explanation for the rise in inflation that does not simply cite successive conjunctural causes is also reflected in the way the labor market is treated.
And that’s because an earlier version of “economic orthodoxy” had translated the notion that inflation is the result of excess demand into a picture of inflation as the result of a “tight” labor market. In fact, it was a reversal of cause and effect.
The fact that this theory advocated (and advocates) anti-inflationary policy to induce recession and increase unemployment in order to reduce demand and lower wages (recession that reduces both production costs and aggregate demand) translated into a perception that the labor market is a causal factor of inflation. This led to the perception that one should aim for that rate of unemployment which ensures that inflation does not increase.
Although this scheme has been refuted in periods where employment growth has not translated into an increase in inflation, but also in the fact that even in the current inflationary boom, wages are not the starting point of the inflationary spiral (on the contrary, inflation generates reasonable pressure to replace the losses of real purchasing power), yet it is a way of thinking that is embraced by many economic policy makers.
This means an indirect pressure towards the need to increase unemployment as a means of reducing inflation, which obviously creates reactions precisely because it undermines social cohesion.
The double-edged knife of interest rates
All this boils down to dilemmas over interest rate policy.
Anyway, the very fact that interest rate policy is reduced to basic anti-inflationary policy, rather than supply and price side interventions, is actually a position taking.
But with growth momentum in advanced economies remaining subdued (even after the slight upward revision of international agencies’ forecasts), the rise in borrowing costs risks triggering an even deeper slowdown, with no certainty that it will also address the core of the inflation problem.
