The risk is to find ourselves in a perfect storm in the coming months. The inflation caused by the increase in energy costs and raw material continues to run relentlessly, while central banks are organizing a faster-than-expected rate-raising strategy. However, in the post-pandemic world, the monetary toolbox to stem inflation may not guarantee such deterministic results. Especially if the rate hike will still have to avoid stifling economic growth.
To decipher such a complicated dilemma there are not many men in the world who are asked to give advice to central governors. Among them is certainly Edmund Phelps, Nobel Prize winner in 2006, professor emeritus of economics and director of the “Center on Capitalism and Society”. For his studies on the balance between inflation and unemployment more than fifteen years ago he had obtained the most important worldwide recognition for an economist. From his New York office, on the Columbia University campus, he is promoting his latest literary effort, "Dynamism", an essay on the effects of innovation linked to economic growth. But Phelps, as mentioned, in addition to studies on innovation remains one of the most authoritative voices in the world on the subject of inflation.
A few days ago the journalist Vonnie Quinn, in ainterview on Bloomberg Radio, asked Professor Phelps about the many uncertainties that are accumulating about inflation expectations and about the ability of central banks to still be the great "normalizers" of economic cycles. In this scenario of incredible uncertainty, not even the world's leading inflation scholar admits to having the precise coordinates to predict what could happen to the global economy in the coming months.
The New Keynesian economist says there are important similarities to the sixties, but that each hyperinflation is an event marked by particular variables. And again: not even American monetary policy has infallible tools to avoid worsening inflation and even a prospective recessionary spiral. Looking at the medium-term horizon, Phelps argues that in general it is still quite likely that we will not experience a period of lasting high inflation. But, and it is this word that gives the sense of uncertainty about the future of the price spiral, such a complex situation cannot be circumscribed in any precise scenario.
Specifically, a post-pandemic restart "crippled" by a dynamic of hyperinflation it could in fact upset all the recovery plans in the US and in the European Union, despite the powerful boost to the real economy that should come from the Biden plan for investments and from the use of Next Generation funds.
For Edmund Phelps, no "professional economist" is today able to release certainties on the fact that we are heading towards a worsening of inflation or if instead monetary policy, specifically that of the Fed, will succeed in its objective of weakening the inflationary dynamic . The causes of the price increase have been in the dock for months, there is no "hidden cause" even for Phelps.
Il Covid and its effects on the supply-demand game of goods, the contraction of the workforce and the congestion in the main ports of the world which has slowed down the normal circulation of goods (the so-called "bottlenecks"). And finally, the knockout blow delivered by the huge aggregate demand coming from public spending.
To conclude: inflation will not only be the bete noire of central governors and western economies because, as the economist originally from Evanston in Illinois reiterated in the radio interview, sooner or later it will also be necessary to deal with the dilemma of productivity (lost). Leaving aside the parenthesis of the information revolution, which took place in Silicon Valley between 1995 and 2005, the West is unable to get up from a very slow productivity and by stagnant growth (even this last forecast is certainly not one of the multipliers of economic optimism). Productivity and sustained growth, Phelps prophesies, will only come from the impulse of some restricted sectors of the economy: the technology sector and the information. It will be even surprising and extraordinary progress. But what will they do for the GDP and wages? I don't think they will do much, says the Columbia University economist.
