Beware of the mirage of inflation

Editorial of the “World”. For years, most advanced economies have lamented the disappearance of inflation. Despite growth, a situation of full employment in the vast majority of them and interest rates at historically low levels, the price indices remained hopelessly sluggish. At this time of the pandemic crisis, the strong recovery finally brought inflation out of its torpor. The question is how far.

The trend is most marked in the United States. In October, prices soared 6.2% year on year. Never seen since November 1990. In the euro zone, the rebound is for the moment less spectacular, but the increase of 4.1% over one year recorded in October is a high for thirteen years.

At first, economists, central bankers and political leaders asserted that the phenomenon was transitory. The spectacular rebound recorded since the generalization of the vaccination against Covid-19 has caused a disorganization of the supply circuits. As supply struggles to adjust to demand, bottlenecks form and push prices up. Energy, raw materials, intermediate goods, recruitment difficulties: the imbalances are increasing, but should gradually be reduced, they explain. Even!

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Since the outbreak of this crisis, nothing has gone as planned. The pandemic was to cause an explosion in unemployment and an avalanche of bankruptcies. Neither took place. Regarding inflation, the reassuring tone of six months ago is no longer appropriate. Central banks now admit the transition will take longer than anticipated.

Rebalancing request

It is still too early to say whether the provisional is intended to last. While a little inflation isn’t bad, watch out for it. The formation of a loop between the rise in prices and that of wages would have economic and political effects with uncontrollable consequences.

In the United States, wages are already clearly on the rise, while in Europe the surge in energy prices is starting to feed claims in the same direction. In most OECD countries, for decades, real wages have grown more slowly than productivity, leading to a distortion of the sharing of value added in favor of capital. The demand for rebalancing has never been greater.

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This is legitimate provided that we do not witness the same scenario as in the 1970s, during the first oil shock, which led to a period of stagflation combining a slowdown in growth and a sharp increase in prices and wages. . Admittedly, this had made it easier for a whole generation of borrowers to access homeownership by reducing the cost of monthly repayments.

Nothing says that the same redistributive effects would be repeated today: real estate prices are much higher, preventing many borrowers from entering the market. On the other hand, history has shown that lasting inflation causes both an erosion of purchasing power, the first victims of which are the lowest incomes, and a loss in the value of the currency which eats away at savings.

The ridge line is perilous. Acting too early to prevent inflationary threats would risk breaking hard-won growth thanks to unprecedented fiscal policies. Allowing the rise in prices to run would lead to a mirage, the effects of which could be just as painful.

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