Less money to spend: despite the spin, inflation is not transitory | Satyajit Das

Households now face a reduction in their purchasing power, unless after-tax wage increases match the acceleration in price increases.

In Australia, the consumer price index for the quarter of September 2021 increased by 0.8%, or 3% over the year. In the United States, the corresponding measure reached 6.2%, the highest for almost 30 years. Official figures probably underestimate the true extent of the rise in the cost of living.

Having underestimated inflationary pressures, the central bank “introspection” produced an emollient oxymoron: “more lasting transient factors”. Hobgoblins wandering through nebulous supply chains are to blame. But there are three factors, two of which predate the pandemic, the effects of which are being overlooked.

First, the price hike reflects the long economic shadow of Covid, especially debt incurred to avoid economic collapse. In 2020, global public debt increased by 13% of gross domestic product to reach a new high of 97%. In advanced economies, it increased from 16% to 120% of GDP. As government spending exceeds tax revenues for the foreseeable future, debt levels will continue to rise. Corporate debt in advanced economies was 102% of GDP at the end of March 2021, up from 92% before the pandemic. Much of the loan was to cover lost income due to blockades and border closures.

These debts will have to be paid by higher taxes, when incurred by governments, or by revenues, in the case of businesses. This will affect the prices.

Companies have to pay off hidden crisis liabilities, such as deferred rents, debt repayments or assistance. Some industries, such as travel, provided credit to avoid cash refunds. Providing the service will incur costs but not new revenues. Restarting operations as well as meeting post-Covid-19 occupational health and safety requirements will require new spending. Companies will set prices to recoup these pandemic losses and higher operating costs.

The slow return to mobility will affect business income, such as tourism and education exports, as well as labor costs. Australia faces labor shortages. The absence of around 300,000 holiday visa workers and international students is hampering agriculture and the hospitality industry. A lack of skilled foreign workers affect large infrastructure projects at the heart of the recovery. Higher salaries and incentives may be needed to attract and retain staff.

Australia faces higher transport costs due to freight capacity constraints, in part due to a shortage of seafarers from developing countries, where vaccination rates are lagging. This is an economic side effect of global vaccine inequalities.

Exponential government spending, low interest rates and central bank largesse (public debt purchases) have pushed up house prices, which is reflected in housing costs and rents. The prices of real estate and pornographic stocks have boosted wealth, encouraging some older workers to speed up their retirement plans, exacerbating pressures on the labor market.

Second, the low inflation in recent decades has been influenced by world trade, with an emphasis on low-cost production in low-cost places like China. In recent years, increasing global competition from electricity, in particular Sino-American quarrels, led to Customs barriers and punishments that delay cross-border trade and access to technology and finance. This affects the supplies of critical components, such as semiconductors and raw materials, creating shortages.

The pandemic’s emphasis on national control of strategic supplies and products is exacerbating this trend. The United States wants secure critical supply chains for semiconductors, batteries, rare earth elements and vital pharmaceutical ingredients, for reasons of national security and ensuring that jobs and production remain in America. The required industrial relocation may result in less efficient production leading to a structural increase in costs.

Third, the inflationary effects of environmental factors and the scarcity of resources are largely ignored. Frequent extreme weather events, the associated disruption of economic activity and damage to facilities are costly. The availability and cost of commercial insurance are increasingly problematic. Who looms food and water shortages also affect price levels.

The poorly thought out energy transition, with underinvestment in traditional and new energy infrastructure, can mean persistently high energy prices. Carbon taxes, levies on carbon-intensive imports and meeting greenhouse gas reduction targets will increase costs. In a perverse way, hoarding commodities as a hedge against inflation creates new price spirals.

None of the factors identified are transitory. Even Covid-19, considered temporary, can become endemic. The likelihood of continuing large health costs (vaccinations or treatments) and intermittent interruptions of activity has not disappeared, as the recent resurgence in Europe shows.

Former German central bank president Karl Otto Pohl compared inflation to toothpaste; once taken out of the tube, it is difficult to put back. The problem is complicated by the limited policy tools available to deal with inflation. Lower interest rates or the printing of money cannot eliminate the virus to restore mobility, break down trade barriers, create raw materials, or reduce extreme weather conditions.

As US President Joe Biden’s declining popularity shows, pocket woes and economic uncertainty matter to electoral fortunes. Faced with an election, Australian politicians have taken note, with each side blovemaking as the top guarantor of stable prices.

Satyajit Das is a financier and author whose latest books include A Banquet of Consequences – Reloaded (March 2021) and Fortune’s Fool: Australia’s Choices (scheduled for release March 2022).


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