Inflation genie will be hard to banish

Fairy-tale genies sometimes resist attempts to shove them back into bottles. Global inflation will display a similar tendency in the coming year because of the changing behaviour of policymakers, businesses, and workers.

Central bankers undershot their 2 per cent inflation targets for years and have been circumspect about slamming the brakes on monetary stimulus even though overshoots have become the norm. And fiscal austerity is less of a fetish than a decade ago, with finance ministers less apt to embrace the policy despite much higher debt burdens. Both groups of policymakers want to ensure economies recover properly from Covid-19 shocks. But that means price pressures will endure for longer.

True, inflation is practically guaranteed to fall in the coming year, albeit later than Federal Reserve Chair Jerome Powell and his global peers had anticipated read more. Its four-decade high of 6.8 per cent in the United States and 4.9 per cent record peak in the euro zone are partly a result of comparisons with depressed 2020 prices. Shortages of goods will also ease up as demand cools and supply-chain disruptions are gradually fixed. Even so, inflation will continue to surpass central bankers’ targets well into the coming year.

There’s a big backlog of orders. And businesses, scarred by supply shocks, may well shift from a “just-in-time” to a “just-in-case” approach by holding more inventories. Walmart, for example, said in November that US inventories were up 11.5 per cent before its busy festive season. Companies could also be readier to pay more for parts made locally or whose delivery is guaranteed and seek to pass extra costs to customers.

The longer high inflation persists, the more likely workers are to push for bigger wage rises. They certainly have more leverage to do so than in the past given post-pandemic labour shortages.