Linflation has reappeared, whereas it was thought to be eradicated thanks to the sole action of central banks, enlightened by a theory which made it a purely monetary phenomenon. The temptation to consider it temporary had to give way to a reality made up of shocks, admittedly unpredictable, but quickly generating sectoral imbalances with lasting consequences.
Whether it comes from production costs or the increase in demand, inflation reveals the existence of sectoral imbalances, which arise from innovations including new products, new technologies, new sources of raw materials. All it takes is an asymmetry in price and wage movements, which are more flexible upwards than downwards, for inflationary pressures to persist, or even worsen, when sectoral disarticulation is increased.
The current situation is an illustration of this. The health crisis, the ecological crisis and then the military aggression of Ukraine by Russia have caused shortages in various sectors – raw materials, agricultural production, industrial components – which have caused prices to explode. What seems temporary can become persistent in sectors where, despite demand that will remain strong for a long enough time, investments are bound to stagnate or even decline, either because activity is doomed in the long term due to pollution ( typically gas activity), or because there is great uncertainty about the future configuration of the market. In this context, the cascading price increases affect the purchasing power of households, with the possible consequence of excess supply and job losses in certain sectors. The specter of stagflation – as in the 1970s – is coming back to the fore. Unanticipated and unwanted relative price distortions can only lead to transfers of wealth and misallocation of resources.
Price control
Faced with these phenomena of a structural nature, the temptation always exists to reduce them to monetary causes. If we follow this theory, it would then be up to the Central Bank to stem it by raising its interest rates, with the sole concern of breaking inflationary expectations, in order to prevent the triggering of a price-wage spiral. .
However, in the current situation, with high public and private debt, high uncertainty and, at least in the euro area, sluggish aggregate demand, a restrictive monetary policy would compress consumption and investment, and create debt management, both public and private, without tackling any of the real causes of inflation. Inflationary pressures would be contained, but at the cost of penalizing productive investments, a rise in the unemployment rate and delays in the necessary structural changes of the energy and industrial transition.
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