LUS Treasury Secretary Janet Yellen said on 1er June, on CNN: “I was wrong at the time about the path that inflation would take. » If we go back to the beginning of the pandemic, the error of the majority of economists and central bankers was much more serious than a mistake in trajectory. The risk of inflation was initially denied, then, once the rise in prices was confirmed, it was put into perspective.
As it only concerned certain products, it was not really inflation but simply an adjustment of relative prices. Then the inflation ends up being recognized but lip service, without panic. It would only be limited, barely above 2%, which is precisely the target of central banks. It would also be transitory, just long enough to absorb the shock. The fact is, however, that today it is breaking records, that a price-wage loop is taking place and that no one dares to predict the end of it.
However, from the start of the pandemic, the risk of inflation was obvious, as the data was, for once, excessively simple. The confinements were going to cause a fall in production greater than that in demand and it is not necessary to be a doctor in economics to understand that this is what experts call an inflationary gap.
An imperfect definition of inflation
Admittedly, initially, the confinements led to self-rationing which masked the imbalance between supply and demand, but at the cost of an explosive accumulation of savings forced by health constraints. When it would come out, as it comes out after the wars, demand would explode even before production had regained its full capacity.
This error has several origins. The first is the very definition of inflation used by central bankers and economists: the rise in the consumer price index. Since for thirty years it had been more or less stable, often even below the annual rise of the sacrosanct 2%, inflation could be considered buried. She would never rise from her ashes.
If one concern persisted, it was about deflation, which is even worse for the economy than the inflation that has been defeated since the 1980s. However, consumer goods are not the only ones showing prices. What about assets (stocks, real estate, etc.)? They haven’t forgotten inflation. But since they had the good taste to absorb the excess liquidity due to overabundant savings and the largesse of the central banks, we weren’t going to make a drama out of it!
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