Price increases and inflation caused by specific factors, such as product shortages, supply / demand and liquidity. The natural or artificial reduction of the availability of a product contributes to a drastic increase of its price. Lack of duration makes the increase permanent.
The ephemeral shortage eventually leads to a return of the price to the initial level. The Covid-19 pandemic has created an artificial shortage of a wide range of products. The reopening of production lines, the accumulation of stocks and the normalization of transport schedules will take some time to be restored globally, continental and nationally. This will definitely happen. Producers have been accused of being greedy, but not suicidal. They know their interest better than consumers know their real needs.
The Pandemic led to a decrease in demand for thousands of products, while demand increased in a few selected product categories. The extent and duration of the reduction was greater than we have ever seen in peacetime.
A wide range of consumer products, from home appliances to cars, as well as services from leisure travel to the catering and hospitality industries, fell by up to 90%. The downturn stopped with the reopening of all these markets. Consumers, with increased savings due to lockdowns, returned en masse to the markets creating the generative condition for inflation, which is a lot of money chasing few products. How long will these conditions persist?
Until the production and supply chains meet the existing demand. Two processes will occur simultaneously. Production will increase, while demand will gradually decrease. After all, human needs can sometimes be excessive, but not insatiable. Shrinking deposit accounts is enough to land consumers in reality.
To the above we must add liquidity as another factor of inflation risk. In response to the pandemic, both the US and the EU, as well as other countries, have boosted their economies by providing huge budget support. Central banks complemented the fiscal response with a wide range of expansionary monetary policy measures through programs such as asset purchasing, liquidity enhancement and long-term refinancing.
Especially for the banks, the EU has helped the most. This joint and coordinated response was successful. The financial impact of the crisis on the company’s employees was less severe than initially expected, while sufficient liquidity prevented the collapse of a suffocating market.
The Americans often use an expression, rain easily becomes a storm. Ιn the period of the Pandemic, it rained money like a storm, but in the end both the economies of USA and the EU equally worked since growth rates for 2021 are expectred to be 6.8% and 4% respectively. Economic imbalances are gradually restored but the question remains-has the risk of inflation been reduced?
It depends. Good news for government spending may be bad news for inflation. The expectation that inflation will be productive presupposes a series of measures and conditions, in particular liquidity support to companies that have been severely affected by guaranteeing subsidy loans. Market must work smoothly. The maintenance of subsidies of this kind distorts healthy competition, disguises chronic structural problems, continues the problematic nature of medium-small companies.
The continuation of horizontal social subsidies must also be re-evaluated. Obviously, they should offer a wide range of Social Solidarity programs, but there is a red line. Chronic grants should not be a hindrance to the effort to increase jobs and generate the permanent incomes they provide.Policymakers should ensure that the observed inflation does not fuel further inflation expectations. This approach maintains an upward trend in real prices determined by the expectation that “whatever I buy today may be more expensive tomorrow”. A specific example is the real estate market and the mobility that has existed in it in recent months.
Another underlying risk is related to the transfer of temporary inflation to wage increases. In this case, there is a risk that prices will stabilize at a higher level. Temporary inflationary pressures will turn into permanent increases in production costs.
Returning to our original question about rising prices and inflation, we can conclude and hope that if the state and citizens show the necessary responsibility, not only a basic principle of economics will prevail, but also a basic rule of physics formulated first Newton “that which ascends necessarily descends”.
