Will inflation stay above pre-pandemic levels?

With inflation above double figures in many economies and central banks tightening monetary policy will consumer prices fall? Some economists believed that the inflation figure is transitory and that the surge in prices would quickly decline with the increases in commodity prices falling out of the year-on-year comparison. The US Fed expects inflation to fall from 5.2% at the end of this year to 2.6% by the end of 2023. Predicting the effects of shocks and monetary policy on the inflation rate has become very difficult.

Alternative Macro Signals construct a “news inflation pressure index” which measures how frequently price pressures are mentioned in the news media. In the US and EU the index is still well above 50, indicating that inflationary pressures are continuing to rack up. There are those who believe that inflation will not return to pre-pandemic norm of low stable price growth – 3 indicators suggest this:

  1. Rising wage growth: Bank of Spain suggest that half of the collective-bargaining deals signed have clauses which tie wages to the level of inflation. Other examples of high pay demands include IG Metal in Germany and rail workers in Britain. The G10 group of countries has had a very steep rise in wages increases from the previous year. Minimum wages are increasing in both Germany and the Netherlands. Australia’s industrial-relations agency has increased the minimum wage by 5.2%.
  2. Public expectations: with higher wages there is an expectations of higher prices – Canadians are predicting 7% inflation whilst Japan 20% (previously 8%) believe prices will go up significantly.
  3. Company expectations: retailer inflationary expectations are on the rise. Bank of England suggest clothes prices will be 7-10% higher than a year ago but are customers willing to accept such price increases.

However there is some hope with supply chain pressures easing – cost of shipping from Shanghai to Los Angeles has fallen by 25% since March. Retailers have stocked up on inventory and cutting prices to sell stock. In the US car production has increased which should ease the pressure on the highly inflated used vehicle market.

Source: The Economist – Why inflation looks likely to stay above the pre-pandemic norm. July 2nd 2022.

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