problem 1: if the mother-central bank gives the children-governments many coins with which to buy their favorite toy (many votes?) and all the children want the same toy that is in the only shop in the village, what will happen to the price of the toy?
problem 2: if the village gas station attendant raises the fuel price, what happens to the price of the toy if the shopkeeper has to go to a distant city to get supplies?
problem 3: if the toy factory of the distant city struggles to find the chips to make the toys work and the cost of chips skyrockets, what happens to the price of toys?
The answer is unique and always the same: the price of toys goes up. And if prices go up… «There's more inflation!», our little readers exclaim in chorus. No, children (so to speak), there is only an increase in toy prices.
However, some pedagogues could object that the mother's behavior is harmful to education. And metaphorically speaking, he would be absolutely right. Economists bring up themoral hazard. But that's another story.
Let me be clear: any reference to real events and characters is NOT purely coincidental. But central banks are not mothers, governments are not children and the problems to be faced here and now do not concern the world of toys, but the acute suffering and dire need of many millions of people.
To use the stark words of Jerome Hayden “Jay” Powell: «The COVID-19 pandemic is causing tremendous human and economic deprivations far and wide in the United States and around the world». And, continuing in the last press conference, the President of the FED (Posterity will remember him as one of the best in history) underlined that the weight of economic suffering has not been distributed solomonically but has fallen above all on the backs of the latter (those who have the lowest wages and who have always suffered from racial discrimination: they are certainly not blessed in this land). Concluding that: «There are people out there who have lost their jobs. The economic upheaval has turned many lives upside down and created great uncertainty about the future». Therefore the Fed will do everything it can to restore lost jobs as quickly as possible (which is not absurd defense of existing jobs, as is done by blocking layoffs).
Incidentally, in Frankfurt and also in Via Nazionale someone take note of like a large central bank it communicates with the entire population, reporting to all citizens with empathy (and not in an elitist way and in the language of priests and insiders) of the reasons for their action. Remember that this too is inclusiveness, a key element of sustainability.
And theinflation? With equally simple words and a serene and conciliatory tone, Powell dismissed the right-thinking: «It's too soon to worry about it». Irresponsible? No. As so many times written and reiterated by Lancet, the powerful forces keeping inflation at bay (globalization, technological revolution, and population ageing) will still act for a long, very long time. Confirming that inflation is NOT a monetary phenomenon.
We will return to this later. First there is the obligation to give an account of one brainy bizarre which raised inflation by about half a percentage point in January in the euro area, which, including other one-off factors, rose from -0,3% annually to +0,9%, and from +0,3% to +1,4% in the version excluding energy and fresh food. An important part of this increase is due to the end of the VAT reduction in Germany and to the different timing of the Christmas sales (earlier than usual). But not even a small part, about half, is due to the change in the composition of the basket.
There are more things in heaven and on earth, Horace, than statistics are capable of measuring. William, or what powders remain of him, will turn over in his grave at Stratford-upon-Avon. From the empyrean of sublime poets, have mercy on us and above all on theabsurd claim of the European statistical offices to try to detect a more precise trend in consumer prices in times of pandemic. With the result of creating other distortions and confusions.
«Inflation is higher than what the indicators saythe commentators wrote thoughtfully last year. As if people, in addition to having to defend themselves from the coronavirus and struggling to get by (mentally as well as economically), should also have the concern of higher price increases.
Not that the commentators weren't right. Theoretically the prices collected should be representative of what people buy. And the indices built for normal times certainly could not well reflect the spending habits disrupted by the lockdowns. Feeling points to the quick, the statisticians have changed a solid and tested methodology and in a hurry they have adequate (with many approximations) the metre which measures the trend in the cost of living. With the result of raising it today (0,5 percentage points are not a trifle if the level is below one percentage point) and lowering it tomorrow (ie in the second half of the year), when we will resume a less suspended existence and the prices of some services, whose incidence on the total basket was decreased because they were not consumed in 2020, will rise more.
Luckily this one botched solution (x è pezo the tacòn of the buso, they say in the mother tongue into which Meneghello translated Shakespeare) has no practical significance. Why inflation was, is and will remain low for a long time. Any imaginative numerological invention you can introduce.
And the reason is very simple. There relationship between price trends and unemployment it broke a few years ago and it will take some good and bad for it to work again as it did in the simplest pre-globalization and pre-digitalization times, when we were younger and beauty shone in our eyes. In fact, while with vaccines we will more or less happily keep Covid-19 and its variants at bay, getting used to living with geo-economic and technological transformations will be more difficulton the political and social level.
Economists call that relationship Phillips curve, from the name of the person who drew the line connecting the levels of unemployment and inflation on a graph. At the end of the 50s of the last century we had gotten a bit to our heads and they were looking for immutable laws of the economic system. Thus, observing what had happened in the recent past, it was seen that as unemployment fell, inflation rose, and vice versa. But, in fact, there are more things in heaven on earth…
Thus the curve has changed features several times over time. First it went vertical, i.e. inflation did not go down even with high unemployment. It is now horizontal, i.e inflation does not rise even with very low unemployment. At least in the US. Which remain the first immobile engine for governing global interest rates, despite the slice of power that the ECB has conquered.
If we wanted to use an image, it is as if a put the inflation puzzle together we had put all the pieces of the edge in their place, the ones that are easier to find and arrange, and the central ones that make us understand what it is are missing. Worse: we should try to compose them without even having the usual photo on top of the package. We would just know more or less what it is.
So, summarizing and concluding. The recovery is accompanying a a series of tensions of various kinds on the costs of firms: bottlenecks in the value chains (Ford and GM are cutting production by 20% due to lack of chips), raw material price increases, transport tariff increases…
But they are careful not to raise their selling prices, because they know there is one turbo-competition and that the handle of the knife is in the hands of the buyers.
So give up all hope you who think there will be a sudden jump in inflation. If it comes, when it comes, it will launch many premonitory signals, earthquakes that will be caught with the seismographs of social tensions. And radical political changes. For now, almost none of this is in sight.
