Global | Coronavirus Watch: Inflation pressures bubble up

The recent broad-based rises in core inflation across a range of advanced economies has reopened the debate as to whether this year’s rise in inflation really is a purely transitory phenomenon.

We still think that base effects and major price hikes in a few components explain most of the increase. These upward forces should eventually abate or reverse.

But we’ve also seen evidence of a modest underlying pick-up in inflation, which may have further to run. Second round inflation effects could offset some of the unwinding of the upward inflationary forces triggered by the pandemic. But for this to be a major risk, stronger wage growth would likely be needed too.

Meanwhile, anecdotal evidence of labour shortages at the firm or sectoral level abounds. But for now, we remain unconvinced that shortages are a bigger problem than they were in the build-up to the pandemic at an economy wide level. We remain wary of concluding that the advanced economies will face a sustained period of strong wage growth that could spark a wage-price spiral.

Overall, the pandemic might trigger a sustained bout of higher inflation than seen in the decade before the pandemic. But that needn’t be a bad thing. A new era of slightly higher, but anchored, inflation within current central bank inflation targeting regimes still seems more likely than an inflation regime shift.

Topics: Economic impact, Inflation, Global economy, Coronavirus, Vaccine rollout, Vaccines, Covid19, Economic recovery, Delta surge