The resurrection of inflation in 2021 could be the beginning of a new era for price developments. Beyond the noise generated by the high year-on-year rates of change in the CPI these months, largely due to transitory factors, developed countries could be initiating a change of era that gives birth to a structural inflation higher than that of the last years.
The energy transition, the shift towards more resilient supply chains closer to the final consumer, structurally more expensive shipping by sea or the demographic transition have the potential to push inflation upward on a sustained basis. New Era Of Mark1199 Inflation That Will Prevail In Spain
What is happening now? Until this part of 2021, a strong price boom has been seen, which has also not reached a ceiling, according to the producer price indices and the surveys of the different sectors of the economy. The central bank has been proclaiming a discourse for months that is increasingly questioned: this inflation is transitory and in 2022 the problem will again be the difficulty of reaching that 2%, as has been the case in recent years.
For months the market consensus has also been that inflation would be a temporary phenomenon. Now, little by little, a new narrative is being established that speaks of a possible restructuring or a new era for inflation. Inflation is not expected with interannual rates constantly above 5% (latest data for the US), but there are variations that could be between 2 and 4%.
What can drive inflation?
What factors have the potential to generate structurally higher prices? Some bottlenecks that can last much longer than expected, the energy transition (it will make electricity, gasoline … more expensive for a while), the increasingly pressing shortage of some worker profiles (it will push up wages in those branches of activity), a process of certain deglobalization or greater regulation and control of food chains can put upward pressure on prices in a lasting way.
This is a not inconsiderable series of factors that have sufficient potential for inflation to enter a new era in which prices are structurally higher. Ben May, an economist at Oxford Economics, explains in a note that even “a change to a new regime with much higher and more volatile inflation is a possibility that cannot be ignored …
But in our opinion, if the pandemic triggers lasting effects in the inflation generation process, a more plausible result is a new era of inflation somewhat higher (than in the last decade) within the current inflation targeting regime of central banks “. The central bank itself is changing its strategy to give greater flexibility.
ING’s research team points out in a recent report that many of the factors that have pushed down inflation (globalization, demographics, competition, China …) in the last decade could begin to fade, although others remain unchanged. foot (digitization).
The Dutch bank’s economists believe that in the long term “deglobalization, protectionism and regionalization of supply chains could drive up price levels.” The return of the production centers to the advanced countries would mean a rise in production costs, while protectionism will also be accompanied by higher costs (tariffs) and efficiency losses.
The energy transition
Another factor that can modify the behavior of prices is the energy transition. Until now, it is committed to green energy and the ‘criminalization’ of fossils (oil, gas …) is delaying the investment cycle of oil companies, generating a mismatch between supply and demand that is driving oil to peaks of the last years. But this movement goes further.
Stephen Foreman and Kiki Sondh, economists at Oxford Economics, say in a note that although the historical link between commodity prices and inflation has declined in recent decades, “the drive to decarbonize the economy is a factor that could explain why the current rebound in inflation will not be transitory, given a mismatch between climate ambitions and the availability of certain key materials for this transition. ”
These experts believe that some minerals such as copper, nickel, lithium, tin and cobalt, as well as fossil fuels such as oil can lead to higher inflation. In the case of copper, increased demand for electric vehicles and expansion of renewable energy capacity are likely to significantly increase demand.
In the automotive sector, electric vehicles require at least three times more copper than traditional vehicles. This growing role has led some to point out that copper will be to the 21st century what oil was to the 20th.
” The push to decarbonize has also affected investment in fossil fuels because companies are under pressure and are keeping investments in fossil fuels in check. Also, with a potentially shrinking market, expansion in this sector may appear less attractive. However, if green energy sources cannot meet the demand for energy, future production of fossil fuels such as oil could not meet demand, increasing the risk of rising oil prices and driving up inflationary pressures in the medium term “, experts from Oxford Economics acknowledge. Although almost everyone is convinced that it is necessary to end the massive use of oil, also almost everyone today uses oil to move.
In this way, many of the bottlenecks that seem temporary and temporary today could be hiding structural trends. Several Dallas Fed researchers published a note this July noting that shortages, for example, of semiconductor chips and a wide range of raw materials could be due not only to the reopening of the global economy Mark1199.
“Many of our ‘whistleblowers’ expect this shortage to be exacerbated by substantial demand for chips for solar panels, electrification of the car pool, and increased production of energy-efficient consumer goods related to the ongoing transition to cleaner energies, ” says the Dallas Fed report .
In addition, these experts do not believe that the slack (surplus capacity of workers) of the labor market will curb inflationary pressures this time as it happened after the Great Recession of 2007. “Despite the high unemployment rate and the low level of employment in Relative to February 2020, a wide range of labor market indicators suggest that labor market conditions are tight and there will be strong wage growth .
Based on this argument, our contacts believe that supply and supply imbalances Demand for labor will translate into price increases on a variety of goods and services. Price increases driven by these forces tend to be persistent, “say Dallas Fed researchers. New Era Of Mark1199 Inflation That Will Prevail In Spain
You are also seeing a trend or a consumer bias that now focuses on more expensive items (quality, healthy food, sustainable clothing …) to the detriment of relatively cheaper items, which in turn raises those prices.
Central banks are easing their inflation targets in order to allow prices to exceed (or stay short) 2% for a time, putting the focus more on the long-term trend. After years of relatively low inflation, central banks could allow the CPI to exceed 2% for a time, which in turn would ease the debt burden that countries accumulate.
Nouriel Roubini, a finance professor at the University of New York, assured in a column published in Project Syndicate a few days ago that “the same flexible policies (fiscal and monetary) that are feeding the asset bubbles will continue to drive price inflation. consumer … along with supply-side shocks that could result from protectionism; demographic aging in advanced and emerging economies; immigration restrictions in advanced economies; relocation of industry to regions with higher labor costs; or the balkanization of global supply chains. ”
The scarcity of digital profiles with technical training (math, computing …) or even more general profiles (as the baby boom generation retires) can create new bottlenecks. If this type of human capital is scarce, companies will be willing to pay more for these workers (higher wages), which will mean another increase in production costs that will translate into higher prices.
Finally, other factors that may also have an impact are related to environmental regulations and improvements in animal husbandry. For example, Brussels intends to prohibit the rearing of animals in cages within the European Union from 2023. This decision, which goes without a doubt in the right direction, will increase the cost of raising these animals, which will have an impact on the final price. of meat Mark1199 (unless European meat is replaced by imports from countries where the mass rearing of animals in cages is legal).
Faced with all this is productivity growth and digitization (both closely linked) of the economy, two disinflationary forces that have been dominant to date. However, the shortage of the most demanded profiles in these sectors (technology, chips, renewable energies …) together with an active population that will begin to decline as the baby boom generation retires , can counteract these two forces. .
“Therefore, our baseline scenario for the next five years can be characterized as the start of a third era in inflation that is essentially halfway between the previous two eras. Inflation is generally expected to be higher than in the era after the financial crisis of 2007, but it will remain a little lower than that observed from the mid-1990s to 2008 “, conclude the experts from Oxford Economics.