"What hump?", asks the gibbous Igor in his cross-eyed candor to Doctor Frankenstein Junior. Those who believe that inflation will rise sharply and get out of the control of central banks brings to mind the paradoxical question in Mel Brooks and Gene Wilder's masterpiece.
On the other hand, anyone who observes the trend of consumer prices can only expect their acceleration in the coming months, followed by a deceleration. Thus drawing, in fact, a hump.
This sinuous profile is explained by a series of non-repeatable factors which have temporarily pulled the increase in prices down during 2020 and which, by failing and indeed turning into their opposite, will push it upwards during 2021. It is advisable to examine these factors one at a time.
Le oil quotations, and consequently the costs along the entire energy chain, collapsed in the first months of 2020, more for the macho confrontation between Russia and Saudi Arabia than for the pandemic crisis. Today they went back to where they were at the end of 2019.
The reduction to a third, first, and then the tripling of the price of crude oil have had and will have an effect on annual inflation. In the USA it can be estimated that they will add 0,8 percentage points to the annual change in consumer prices compared to current levels (1,4% in January); something close in the euro area. Therefore, there, solely due to the comparison effect of energy prices, the trend in total consumer prices will rise to 2,2%, here it will go from 0,9% to 1,7%. But this step will disappear in the second half of the year.
I work and study from home have hit the market hard rental housing, with a sharp drop in demand which has lowered prices. In many situations, then, the annuities due have been self-reduced, due to the income difficulties of the owners. The result was a marked slowdown in the dynamics of this component of the cost of living. The restoration of "normality" in rentals will add half a percentage point to the dynamics of US prices (much less in the Euro area, due to the lower incidence of this expense item in the calculation of the index). It will take a few months longer than the energy cost (maybe even a year), but it will be a stable addition. Which, however, will be mitigated by slowdown in the cost of food (accelerated to 4% in the USA and the euro area), which has already happened here and is yet to come and will remove 0,3 percentage points.
Then there is the encourage-consumption maneuver, launched from Germany with the VAT yo-yo, which removed from July and added back from January 0,3-0,4% to annual inflation in the euro area. It will add the same from July (when the comparison is made with the discount effect), while from January 2022 it will decrease by 0,6-0,8%. For something around 1%, that's quite a hump.
Finally, there are the difficulties along the manufacturing production chains, due to travel restrictions, on the one hand, and exuberant demand for some goods (an outlet for consumers frustrated by restrictions on social activities; resumption of the investment rush), on the other. But both will disappear with the normalization of the economy. Thus, if we observe some industrial product prices accelerating now and in the coming months (as the price component of the PMI suggests), then we will experience their deceleration afterwards.
Moreover, it should be noted that globally in the set of manufacturing and non-manufacturing (mainly services) the price increases are very low. In the euro area in particular, where for the prices collected in February the PMI was 50,3, i.e. stagnation, despite the 58,7 of those paid.
In the United States the numbers are higher, but the periodic survey by the FED, ahead of the board meeting, continues to report little pricing power of companies, so that the higher costs affect margins, with forecasts of modest price adjustments also in the coming months.
Here, then, that there will be in consumer prices the hunchback à la Igor.
For some, however, we will have no hump. Novelli Igor, deny its existence because they believe that the increase in consumer price dynamics will only be the beginning of an inflationary process that central banks will get out of hand. A bit like what happens to Mickey Mouse-sorcerer's apprentice in Fantasy fabric by Disney. It's this one denial belief it is already putting long-term rates under tension.
Mervyn King, former Governor of the Bank of England, criticizes the overconfidence with which the monetary authorities are evaluating the risk of inflation. And he invites them to react promptly, to avoid raising rates too late and too abruptly. King even believes that central banks are jeopardizing their own independence. And, before him, Andy Haldane, brilliant chief economist also of the Bank of England, expressed similar concepts (will it be the English variant of central bankers?).
To answer the no-hump it is good to do the summary of the many previous episodes, starting from the end of history: inflation is dead and buried. In all the major advanced countries and in China (pig fever permitting) the trend in consumer prices has been struggling for years to rise towards the monetary authorities' goal.
Many years ago, as told in fairy tales, the 2% annual increase was set as the maximum ceiling, so as to guide expectations and shape behaviours. For example, the negotiations for the renewal of employment contracts or for supplies between companies and, consequently, the fixing of the price lists for the final goods (those that are relevant for the surveys of the cost of living).
In Italy forty years ago, this ploy he had a father-martyr (he was assassinated by the Red Brigades) in Ezio Tarantelli; not recognized as a father just because he was not a scholar of central banking: there are castes even among economists. Un ploy which was very successful, thanks also to the convincing use of the interest rate stick. If there was as soon as there was the slightest risk that inflation would start to rise again, a preventive bludgeon would arrive with a sharp increase in rates by the central banks.
It was so successful that central bankers convinced themselves they were new wizards Merlin, capable of keeping inflation around 2%, with measured strokes of the baton (pardon: stick) of rates.
But over the last twenty years, more or less (rather more than less: in the mid-XNUMXs, the Chairman of the FED, Alan Greenspan, was racking his brains over the modest increase in prices despite the rates that then appeared very low), the central banks they seem to have lost the magic touch, because inflation doesn't want to know about approaching 2%, in the sense that it stays decidedly lower. Threatening, indeed, to turn into its opposite, i.e. in a continuous and prolonged drop in prices: deflation.
What spell undermined the magic power gods central bankers? They intervened The crisis, the financial one of 2008-9 (with a repeat in 2010-12 in Euroland), first, and the pandemic one, then. These crises have created a empty of demand and a full load of jobless which made it difficult for the monetary weapon alone to revive the price dynamics. So much so that, starting from Mario Draghi (always SuperLUI!) in August 2014, the central banks have clearly stated that it was up to budgetary policy to adequately support demand, also in order to achieve higher inflation, as well as higher employment.
Now, convinced by the pandemic, i governments and parliaments have begun to spend and spread. Much more in the USA than in the euro area, but given the existing anti-deficit dogmas, it has already come a long way. Will it be enough to reawaken inflation?
The answer of the no-hump is that it will be enough. At least in the USA, where the new aid package of 1.900 billion dollars is added to the 900 billion dollar one launched at the end of 2020 and, according to economists who are certainly not conservative on public intervention in the economy, will push GDP at least 5% above potentialcreating inflationary pressure.
The point is that these aids are one-off and replace unearned household income. In 2022 those aids will disappear and consequently there will be an equal and opposite boost to GDP. It is true that a large part of these transfers, together with a higher than usual share of wages, was forcibly spared (see the piece of the Lancet on the real economy) and could translate into additional demand, but even if it were, will this be translated into higher prices and wages?
It is doubtful. And the reference to eras and periods of the past, when inflation escaped (or was let escape?) from the hands of central bankers, does not make much sense or much to teach us, because we live and act in a completely different and revolutionized world from globalization and digital transformation.
In previous releases of Lancet we have explained at length the action of both: global competition through the exchange of goods but also the call centers and computer engineering centers or processing of hotel reservations and travel located in emerging countries (the latter hardly used now), the transparency of costs and prices thanks to the Internet, penetration of online in new sectors, increased productivity and savings from Industry 4.0 and its components, speed and clarity of images with the 5G technology (so much so as to allow remote brain surgery), and so on and so forth ("Open wide the door to the cage of the mind, and, you will see, it will launch itself flying towards the sky", writes the English poet John Keats).
And then there is immigration, the other face, even more difficult to digest socially, of globalization. Can't you cut your hair remotely? But a Chinese or other Asian hairdresser who comes to us is satisfied with half the price of a native. One can argue about the quality of the cut and the conversation, but razor sharp prices are indisputable.
Finally, there is the crucial element: the inflationary chain the strong link is missing today, Namely the increase in wages. Without this ring no inflationary process can take place. It may be that increases in the minimum wage, greater union protection and other measures introduced by law restore bargaining power to work. But if it doesn't come true, and it won't come true, the final invocation of the Manifest by Karl Marx and Friedrich Engels («Sie haben eine Welt zu gewinnen. Proletarier aller Länder, vereinigt euch!»), inflation in a single country does not appear very practicable, if not by crowding out domestic production in favor of foreign production.
