Today inflation is on the front pages of newspapers around the world , and for good reason. The prices of more and more goods and services are rising in a way not seen in decades. This inflationary peak, together with the shortage of supply, be it real or feared, is generating anxiety in consumers and producers. Also on a hot political issue, as it threatens to exacerbate inequality and derail the much-needed sustainable and inclusive economic recovery after the Covid-19 pandemic.
For their part, the central bank authorities of the United Kingdom and the United States have begun to move away from the narrative of a “transitory” inflation . This cognitive transition at the European Central Bank is less pronounced, which makes sense given that the inflationary dynamics there is less drastic. But it is far from reaching its peak, and even less with the desired speed, particularly at the US Federal Reserve, the world’s most powerful and systemically important monetary institution. Nor are the delays by the US Congress in passing measures to increase productivity and improve labor force participation much help.
The reasons for rising inflation are well known. Buoyant demand is finding inadequate supply, a result of disruptions in transportation and supply chains , worker shortages and energy constraints.
While notable, these price hikes do not herald a return to the double-digit inflation rates of the 1970s . Price intervention hardly occurs in time. The initial conditions around the formation of inflationary expectations are much less volatile. And the credibility of central banks is far greater, although today it is facing its most severe test in decades.
Still, inflation will be far more pronounced than Fed officials thought when time and again they dismissed mounting price pressures as a transitory phenomenon. Even today their inflation estimates underestimate what lies ahead , despite having been revised upwards several times already.
Inflationary expectations based on surveys compiled by the New York Federal Reserve have risen more than 4% over the one- and three-year time horizon. The collateral effects of inflation trends on costs are widening . Churn rates among American workers are at all-time highs as employees feel more comfortable quitting their jobs to seek higher-paying jobs or a better work-life balance. There is more talk of labor strikes. And all of this is exacerbated by consumers and businesses looking to meet their future demand, primarily in response to concerns about product shortages and rising prices.
The current inflationary outbreak is part of a general structural shift in the global macroeconomic paradigm . We have gone from a situation of poor aggregate demand to one in which the demand is generally sufficient. Notably, US retail sales increased 13.9% year-on-year in September, higher than expected, indicating that there are still plenty of spending spaces available for purchasing power to translate into effective demand.
Of course, this is not to say that there are no demand composition issues that need to be addressed. Inequality remains an urgent concern, not only of income and wealth but also of opportunity.
A higher inflation and persistent stresses these concerns, because its implications are multifaceted: economic, financial, institutional, political and social. Its effects will be less and less uniform and will hit the poor particularly hard. Globally, the consequences of rising inflation threaten to hit some low-income developing countries, pulling them off a secular path of economic convergence.
All of this makes it even more important that the Fed and Congress act swiftly to ensure that the current phase of inflation does not unnecessarily end up undermining economic growth , increasing inequality, and fueling financial instability. A marked reduction in monetary stimulus is needed, which is still operating in extreme emergency mode, despite the unfortunate timelines that govern the new Fed policy framework. And US lawmakers can help by energizing initiatives that improve the economy. supply, both capital and labor, that are fully within their reach, that is, approve measures to modernize infrastructure, promote productivity and increase the participation of the labor force.
The authorities should also strengthen prudential regulation and supervision of the financial sector, especially the non-banking system. And, given the increased pressures on corporate profit margins and the superior ability of large companies to navigate through supply disruptions, they will have to be very vigilant about the concentration of companies.
It is good news that, after initially misinterpreting the dynamics of US inflation, today there are more Fed officials who are getting a better understanding of the situation. The Fed itself would do well to catch up faster. Otherwise, you will end up in the middle of a culprit hunt that would only erode public credibility and undermine your political reputation.