Partisan fearmonger Senator Jim Bolin must be excited to see his dire warnings of inflation gain some support from current economic data showing prices rising at a 13-year-high rate of 5% last month. But John Tsistrian tells Bolin and other inflation tremblers to relax—price increases are to be expected as we recover from an economic shock as severe as the pandemic:
What we all want to know is this: is the current price run-up in several sectors of the economy the beginning of an inflationary trend? Or is it just the natural reaction to consumer-driven demand caused by the recent easing of pandemic era restrictions? And is it just temporary and not a sign of widespread inflation that will cause the Fed to take some action by raising interest rates?
I think it’s the last of the three, and for the time being at least, the Fed does too.
Analysts at Forbes note that “The Fed has warned the public over these and other supply-chain issues, too, saying that it’ll take time for sectors of the economy to get back to normal. Once these kinks are worked out, the Fed asserts, inflation will stop growing so quickly.”
In other words, price increases that are showing up in various spots in the economy are created by functional issues, basically shortages of products that are in demand by consumers who are spending more freely now that the pandemic’s economic effects are getting behind us [John Tsitrian, “Stock and Commodity Prices Have Been Soaring Since Biden Was Elected. Will Inflation Suddenly Rein Them In?” South Dakota Standard, 2021.06.14].
I don’t like paying more for my raisin bran any more than you do, but would we really prefer that Americans all go back home and stop buying things? Do we really want Kristi Noem’s family and everyone else to send back their coronavirus relief checks? Don’t we have an excellent opportunity here to let the Invisible Hand show its omnibeneficent brilliance by inviting entrepreneurs to unkink the supply chain and satisfy all that pandemic-pent and now vaccine-vaulted demand?
Besides, our domestic inflation, driven largely by sectors like cars and travel that got pounded by the pandemic, is not being replicated around the globe. The pandemic did not change the fundamentals of a global economy that still work toward lower prices:
Inflation worries are not just a US question. However, because the US and European Central Bank measure different baskets of goods, their numbers are not directly comparable (see charts). The ECB said last week that it expects full-year 2021 inflation to reach 1.9%.
“We don’t see much by way of service prices going up,” ECB President Christine Lagarde told a press briefing on 10 June, “and that is because wages have not increased significantly.” The ECB is assuming, she added, that the supply bottlenecks now visible in the eurozone “will gradually phase out.” In addition, for the first time since December 2018, the ECB sees risks to growth outlook for the region as “broadly balanced.”
The central bank increased the eurozone’s gross domestic product (GDP) forecast to 4.6% for the full-year 2021, from 4.0% as the pace of the region’s recovery picks up, and reassured markets that the positive outlook does not change the commitment to increase its asset purchases.
When discussing inflation, we also have to keep an eye on the wider world and longer-term dynamics. Economies that are further along the road to economic recovery, such as China and Israel, are not recording more than modest inflation. Elsewhere, inflation remains below central bankers’ 2% targets in Switzerland, Japan and the eurozone.
Despite disparities between developed and emerging economies, globalisation remains deflationary. The pandemic has not altered that the world’s population is still aging, the impact of technological innovations and global competition. Furthermore, this positive outlook is supported by more flexible monetary policy. Last year the Fed shifted to ‘average inflation targeting.’ Concretely that lets policymakers ignore short-term spikes above their 2% target to look at the wider economy [Stéphane Monier, “Post-Pandemic Inflation: Now You See It, Now You Don’t,” Bank Lombard Odier & Co., 2021.06.14].
Senator Bolin frets about inflation because he wants to find some tarnished lining on the silver of the economic stimulus that kept the pandemic recession from turning into a depression. But we should expect prices to rise as we recover with surprising vigor from the worst economic shock yet of this century. And Senator Bolin isn’t about to give up any remaining stimulus dollars or wish away increased consumer demand or any other healthy market responses. Tsitrian and the markets aren’t freaking out over inflation; neither should the rest of us.