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Macroscope | Why the inflation threat is more serious than most economists and policymakers realise or are willing to admit
- As inflation continues to rise in the US, UK and Europe, economists are quick to blame temporary disruptions to global supply chains caused by Covid-19
- The structural aspects of today’s inflation may take a long time to subside and require aggressive action by central banks that could hit major economies hard
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Many economists have a ready and glib answer to the question of what has caused the wave of inflation currently breaking upon the shores of advanced and emerging economies around the world. It is chiefly the impact of the Covid-19 pandemic on supply chains, they say – and then leave it at that.
But what if, beneath the wave whipped up by turbulence in supply chains, more threatening, tectonic shifts are beginning to shake the figurative ocean bed of the world economy. Should we not be paying more attention to those if they portend a possible earthquake?
US consumer price inflation hit 6.8 per cent in November (its highest level in 39 years) compared with a year earlier, while UK inflation has reached a 10 year high of 5.1 per cent. It is getting difficult to shrug these off as just transitory phenomena.
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The US Federal Reserve is now adopting a more aggressive inflation-fighting stance that has a long-term look to it. The Fed is doubling its pace of monetary tapering and says it intends to make three interest rate hikes next year and three more in 2023.
We’ve heard a great deal lately about supposedly passing inflation caused by Covid-19-induced interruptions in the global flow of goods and services. But we hear little if anything about structural inflation, which is a more lasting and menacing threat.
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Wage inflation also tends to be regarded as a short-term phenomenon caused by temporary bottlenecks in the supply of labour. The fact that rising prices for goods and services leads to higher inflation expectations – thus exerting upward pressure on wage levels – tends to be overlooked.
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