A toenail that grows and becomes a bit long is not a big deal. Sooner or later you will find the time to cut it. An ingrown toenail, on the other hand, that really hurts (except for some Indian holy men, who have become totally extraneous to earthly things).
The same can be said of inflation. As long as it rises a bit, in a context where there are natural “limes” of prices (competition in and between markets, underutilization of production factors, work in primis, technological progress that increases productivity) then its rise cannot be a cause for concern. Sooner or later it comes back on its own.
If, on the other hand, it becomes embedded, i.e. incorporated in the expectations and behaviors of the operators, then it's time to take it into consideration and head on. But how do you know when the rise of theinflation is embodied in the body of the economy?
Economists, whose ingenuity is not lacking, have created a specific indicator of consumer prices. Based on the observation that there are price lists that are changed infrequently (once every six, twelve months); therefore called sticky (sticky). For a variety of reasons. Among which the cost of updating the price lists themselves and the image of reliability with customers. Paul Krugman, Nobel laureate with a sharp pen, suggests keeping an eye on this indicator to understand if inflation tends to embody itself.
Currently, however, whether we look at the trend of sticky prices or at inflation net of prices that fluctuate a lot (such as energy and food), there is no place where inflation points upwards.
Despite the increases in both input and output prices denounced by corporate purchasing managers, both in the tertiary and manufacturing sectors. In fact, the component of the prices of PMI indices is at very high levels, sometimes at historic highs.
However, it is good to remember some aspects. first of all, these indices are relatively recent. So their records have no heuristic value whatsoever. For example, they didn't exist when inflation was really high, like in the 70s and 80s. This lack of authentic historical perspective because it does not allow us to know what values the PMIs should take to "signify" a real inflationary danger.
Furthermore, i Today's traders have always lived in an environment of moderate price dynamics or non-existent. So they are more easily surprised in the event of price increases and judge them strong when perhaps they are not.
Again, someone could argue that, if only input prices increased, it would be too bad: inflation would not reach end customers and would remain contained. But today they are increasing, according to the PMI, the prices of outputs as well. Tuttavia, in the economy, at least two-thirds of firms produce inputs for other firms, and the prices charged by the former are output prices. Therefore it is normal that when overall it appears that the prices of the inputs increase, the prices of the outputs also rise (which are, in fact, semi-finished inputs).
Also, the indexes PMI are indicators of diffusion: they are high when many companies experience the same situation, and vice versa. They say nothing, however, about how strong the cost and price increases are.
Finally, as already reiterated several times by Lancet, The price that acts as the prime mover that sets the benchmark for all other prices is the cost of labour. As long as this increases little or no increase at all, then inflation cannot take off. And under the current conditions of high unemployment (in April in the USA there was little change and the real one was much higher: 10% against 6%), there is no room for requests for wage increases.
And i raw material price increases? And those of the chips? They will shift profit margins and purchasing power towards their producers, but will not trigger inflationary spirals.
Read the Hands of the Economy of 8 May 2021:
- Economy: recovery with the consumption turbo in sight, the virus willing
- Inflation or not? For now she is not scary and will not become "grown"
- Rates are sniffing recovery, record stock exchanges and a steady dollar
