Last week (20 January 2022), Eurostat released the latest inflation figures – Eurozone inflation hits 5.0% per year – Following the release of BLS data (January 12, 2022) – Consumer Price Index Summary , the latter was astounding as it recorded an annual inflation rate of 7% before seasonal adjustment. Inflation in the euro area over the same period was 5%. Given the dominance of pandemic noise, it is obviously difficult to see clearly through data trends. But I stand by my 2020 assessment (updated several times since) that we are still seeing short-lived price pressures due to the massive disruption to production, distribution, and shipping systems from the pandemic. In a sense, I am surprised that inflationary pressures are not greater.
The chart below shows the evolution of the Harmonized Price Index for all groups, as well as the so-called “core” measures in the measure (excluding volatile items such as energy, food, alcohol and tobacco), which are intended to provide a more stable view of potential price pressures. .
The lines are the annual rate of change (percentage).
After 1.22% at the start of the pandemic (January 2020), the December 2021 annual all-group (title) rate was 4.96%.
However, in December 2021, the less volatile items (core) across all groups were only 2.62%, compared to 1.09% at the start of the pandemic.
A bigger factor driving the All-Groups index was energy prices, which rose 26% for the year. For Europe, this is mainly the result of a reduction in Russian gas supplies.
Food and industrial goods are growing at about 3% per year (part of this is the impact of energy prices on costs).
If we examine the acceleration rate (change in rate) of the index, then over the two-year period (since the start of the pandemic), the growth rate for all groups was 3.64%, but the core rate was 1.32%.
That’s because the ECB has bought nearly all the public debt it has issued since the pandemic, and governments are spending more freely than before to deal with health concerns.
The assessment is that the experience of the euro does not suggest that governments will shift to accelerating inflation on a large scale.
If you consider the transmission mechanisms that might institutionalize these pandemic-driven price spikes – wage pressures, for example – you won’t find them currently operating in Europe.
Another interesting aspect of price movement is the impact of government charges.
In research I did a few years ago (not long ago), I found that significant changes in the price level (CPI) in Australia are driven by government price influences, so-called managed prices, which include indexed health care costs, etc., indexed utility bills, etc.
Eurostat – method manual – explain:
Managed prices (HICP-AP) is an analytical index that provides a summary of the development of product prices either directly set by the government or largely influenced by the government.
The chart below compares the annual inflation rate for all groups and managed prices.
The composite index has gained 5.75 points since the start of the pandemic, while the core index has gained 4.64 points. However, the management price index rose 5.96 points, outpacing the broader index.
We also see that with the introduction of indexation arrangements, the impact of government charges is generally higher.
I expect the managed price impact in the January 2022 data to decline slightly as the impact of the German standard VAT rate increase expires, which increases to 19 after reducing to 16% on January 1, 2021 % The percentage for the period July 1, 2020 to December 31, 2020.
The December 2021 observation was the last to be affected by the adjustment. My estimate is that it will reduce core inflation by 0.35 to 0.4 percentage points.
evaluate
What about those transmission mechanisms?
First, there is no evidence that the EU economy is overstimulated.
The latest IMF – financial monitoring (October 2021) – Provides an estimate of the government’s base fiscal balance for the forward estimate period from 2012 to 2026 – as shown in the chart below.
The crunch mentality is still evident.
Before the pandemic, euro area member countries collectively had primary fiscal surpluses, and their response to the pandemic was much lower than that of other developed countries.
Furthermore, the level of fiscal austerity shown in forward estimates suggests that government deficits are unlikely to fuel an acceleration in inflation.
Furthermore, the stimulus received during the pandemic will dissipate, unable to drive the inflation process.
Please continue to pay attention to the recovery of the excessive deficit mechanism, which will further inhibit the government’s ability to increase inflationary pressure by expanding the fiscal deficit.
One also needs to consider other components of total spending.
And for Europe, persistent large trade surpluses are clearly a policy priority, in part because governments (especially in the North) have deliberately suppressed the ability of domestic demand to grow.
Wage growth has been deliberately suppressed to remain internationally competitive, which means household consumption spending isn’t going to fly away anytime soon.
The second is the supply bottleneck.
The chart below shows all groups and the core indicator (index of 100 in January 2020) and the producer price index (from Eurostat).
Between January 2020 and November 2021, the composite index rose 9.9 points, the core index rose 7.7 points, and the producer price index rose 20.1 points.
Such is the impact of the pandemic.
It is not driven by fiscal or monetary policy settings.
Various basic inputs to production have been subject to supply constraints – lumber, semiconductors, etc., and supply constraints combined with the difficulty of actually moving freight around the world have led to these temporary price increases.
Once the pandemic eases and these prices return to some normal level, the inflationary impact will go away.
The ECB published an interesting analysis in its Economic Bulletin (No. 6, 2021) – The impact of supply bottlenecks on trade.
They concluded:
1. “Transport disruptions and input shortages are causing considerable bottlenecks in global supply chains” – so goods get stuck where they shouldn’t be.
2. “During the recovery phase of the coronavirus (COVID-19) pandemic, households have increased their purchases of certain products, such as electronics and home improvement equipment, leading to a larger-than-expected surge in demand, especially in certain industries” – As a result, there have been specific changes in the composition of pandemic-driven spending.
In this blog post I show the effect of this on the US inflation rate – Central banks are fending off inflation scare hype from financial markets – so we’re better off (December 13, 2021).
3. “Coronavirus outbreaks in ports, factory accidents and adverse weather conditions have caused bottlenecks in the transport sector and led to shortages of specific inputs such as plastics, metals, wood and semiconductors” – hence the rise in producer prices.
4. “Inventories fell at the onset of the pandemic due to reduced inventories and shortages of inputs due to closures and conservative inventory policies, making it difficult for businesses to keep up with the rapid increase in demand and replenishment of depleted inventories” – some market-powerful companies take advantage of this The situation maintains profits through higher prices.
5. “Overall, the lead time index for global PMI suppliers fell to an all-time low in June (implying longer lead times) since records began in 1999.” (June 2021) – This means that the shortage period has been extended.
6. The ECB estimates that “supply bottlenecks have an impact on export growth beyond the role played by demand conditions” and are valued at around 6.7% in euro area exports and 2.3% globally. The impact is huge.
Then we come to the issue of regulation.
It is clear that some large companies who can exercise market power (i.e. raise prices and maintain sales) are using supply constraints to increase profits.
For example, this situation is not different from what happens in times of major conflict, which is why the government introduced various regulations (rationing, price controls) to prevent this predatory behavior.
The Hungarian government has frozen the prices of some food items (sugar, flour, cooking oil, dairy products) to reduce the ability of businesses to take advantage of supply shortages.
I noticed, of course, that the government is running for re-election this year!
Finally, when one considers all of these issues, one wonders why economists are calling for a rate hike.
Do we know why?
Because they are “one trick ponies” and are indoctrinated to consider inflation -> monetary policy -> interest rates.
The world has shaken off its obsession with the dominance of monetary policy.
But think about it.
With government scaling back stimulus support, spending in danger of falling, household consumption and business investment spending muted, waiting for more certainty ahead, and exports falling due to supply constraints, how could anyone conclude that increasing the cost of borrowing money to invest will helpful.
And how to increase interest rates, speed up ships, reduce the number of workers in the transport system who get sick from Covid, make ports work faster when there are not enough containers (because they are in the wrong ports), improve weather and stop natural disasters from affecting timber supplies Impact, can we continue?
We just need to be patient and focus on defeating the virus, and inflationary pressures will ease soon.
in conclusion
When I say I think inflationary pressures are transitory, one shouldn’t assume they are transitory.
Temporary means that once supply chain bottlenecks ease, there are no institutional measures that could allow price pressures to continue to accelerate.
How long this takes depends on the course of the pandemic.
Maybe a few years.
Annual Helsinki Public Lecture and Teaching Programme – January-February 2022
Tomorrow (Tuesday, January 25, 2022), as a lecturer in Global Political Economy at the University of Helsinki, I will be giving my annual public lecture on the topic of the global economy and the pandemic via YouTube Live.
This is an annual lecture that I have had to teach remotely for the past two years due to the coronavirus hamper.
The YouTube link for the stream is https://youtu.be/TEm_77Y7eNs
Lecture starts at:
- 19:15 Melbourne, Sydney time
- 10:15 – Helsinki time
- 08:15 – London time
- 03:15 – New York time
- 17:15 – Tokyo time
- 00:15 – San Francisco time
You will also be invited to my classes in Helsinki for the next two weeks.
Although these lectures are part of the university’s formal graduate program, I have been allowed to make them public as part of an outreach program.
The teaching plan will be:
- Tuesday, January 25, 2022 – Streaming public lecture (YouTube) starting at 10:15 Helsinki time.
- Wednesday, January 26th – First Zoom Class Lecture – 08:15-09:45 Helsinki time.
- Thursday, January 27th – 2nd Zoom Lecture – 10:15-11:45 Helsinki time.
- Tuesday, February 1 – 3rd Zoom Lecture – 10:15-11:45 Helsinki time.
- Wednesday, February 2 – 4th Zoom Lecture – 08:15-09:45 Helsinki time.
- Thursday 3 February – Final Zoom Lecture – 10:15-11:45 Helsinki time.
The Zoom link to the lecture is:
https://helsinki.zoom.us/j/5354174274?pwd=OHdTdWJzSHNndHpyVkV2Y0lJUExRZz09
Conference number: 535 417 4274
Password: ETZhk9
I hope to meet some of you in “Classroom”.
This is an MMTed initiative.
Enough for today!
(c) Copyright 2022 William Mitchell. all rights reserved.
