“There is a lot of debate these days about the more or less temporary nature of inflation which manifests itself in an ever-growing number of sectors: in Europe, inflation is still contained in consumer prices, but businesses clearly feel it here too in the continuous rises in the prices of raw materials and important components such as semiconductors”. So Alessandro Fugnoli, Kairos strategist, in the last episode of his monthly podcast “On the fourth floor”.
“The Central Banks are scrambling to say that it is a temporary flare-up – continues Fugnoli – however it is the Central Banks themselves who declare that they want higher inflation. The market is confused and in some parts of it it behaves as if inflation were really temporary, while in others it seems instead to start discounting a structural increase in prices”.
According to Fugnoli, the confusion arises from two factors: “The first is that we are simultaneously faced with two distinct types of inflation, temporary on the one hand and structural on the other. The second factor that complicates things is that Central Banks want higher inflation at the same time, but also stable rates close to zero. This is why they put the accent on temporary inflation when they want to convince the markets to accept low rates, at the same time the Central Banks work to raise the level of structural inflation”.
In detail, "temporary inflation it is the result of the great disorder created by the pandemic - continues Fugnoli - The collapse of production in the spring of 2020 and the uncertainty about the duration of the crisis led many companies to make assumptions about consumer behavior which later turned out to be wrong. For example, it was thought that with people locked up at home and with less money around, the demand for cars would drop drastically. The automakers immediately cut production and so did their suppliers. When they later discovered that thanks to public subsidies and lower daily expenses there was actually more money than before to buy durable goods like houses and cars, growing demand was faced with declining supply. Firms that had destocked have found themselves suddenly having to replenish them and now have to overpay to get them. In this chaotic situation, transport costs have obviously also increased, also due to the increase in the price of oil.
For the Kairos strategist, “this messy inflation will subside within a few months for most sectors. Next year at this time inflation will be much lower than now and many will say “you see, you cried wolf and nothing serious happened”. Right, but in the meantime, more silently, it will have left structural inflation. When next year the output gap will be exhausted, ie when global demand will have put the human and material resources rendered idle by the recession back to work, prices will begin to move slowly but in concert. And they'll do it at that point for years, not months."
In summary: “A blaze this year, a return to an apparent normality next year and then a gradual and solid rise in inflation in the following years – concludes Fugnoli – We are certainly not talking about hyperinflation, but a cruising speed closer to 3% than 2% in the United States shouldn't come as a surprise. In Europe things will be slower, but the direction will be the same".
