Has stagflation arrived? The rise in prices shakes the recovery

It is the new unknown. The rise in prices – which each month mark highs not seen in more than ten years in the West – has entered the equation of international economic recovery with a lot of noise. Inflation, which seems to have no ceiling at the moment, already worries governments, central banks and analysts . Has this price escalation already awakened the stagflation monster?

This word implies economic stagnation, rising unemployment, and rampant inflation. The cocktail everyone dreads . The situation has already provoked reactions within the European Central Bank (ECB) , which is now divided on the advisability of beginning to withdraw its monetary stimuli before it is too late. The asymmetry of the recovery between the European partners does not make it easy. While the economies most dependent on tourism and sectors that involve greater social contact – Spain among them – still show significant consequences, the rest are already on the road to recovery.

The uncertainty about the recovery maintains the fear of withdrawing the stimuli

Despite the voices of hawks from central banks, who ask to begin with the withdrawal, the uncertainty about the recovery maintains the fear of withdrawing the stimulus. All this at a time when there is a strong shock from the supply. This accumulation of stimuli -monetary and fiscal-, of vigorous recovery and of limited supply threatens to lead to inflation much higher than real GDP growth. A phenomenon of which several analysts warned of its possibility in the medium term. However, the famous economist Nouriel Roubini, a professor at New York University, believes that he is already getting ahead in the United States .

Inflation is at a decade high . The euro area signs 3%, the OECD as a whole 4.2%, and in the United States, where the greatest alarm signals come from, it reaches 5.4%. The debate among analysts is now on whether these figures will continue over time and whether GDP growth will be able to absorb this price hike .

Inflation could stay above 5% for a while, while economic growth could have peaked. That is the main fear. Until recently, economists had focused more on medium-term risks. Now they dare to argue that stagflation – albeit mild – is already underway . Prices are rising in advanced economies, and growth is slowing dramatically, despite massive monetary, credit and fiscal stimulus.

There is some consensus on the causes of slower growth in America, China, Europe and other major economies. The loss of traction is the result of supply bottlenecks in the labor and goods markets. “The optimistic turn from Wall Street analysts and politicians is that this mild stagflation will be temporary and will last only as long as the supply bottlenecks last,” says Roubini from New York.

What are the Americans based on to say that it will be temporary? They believe that the impact on prices is due to the Delta variant of the coronavirus. In his view, it temporarily increases production costs with small confinements and restrictions. It also reduces production growth and restricts the supply of labor.

In addition, on the production side, Wall Street analysts point to the Delta variant disrupting the reopening of many sectors and launching a new torpedo into global supply chains, ports and logistics systems. The shortage of key inputs, such as semiconductors, further hampers the production of cars, electronics, and other consumer durables, driving inflation. It seems like a perfect storm, yeah. But economists hope it won’t last too long.

What if this optimistic forecast is wrong and stagflationary pressure persists? The most negative views predict that supply shocks will persist in the medium and long term. The trend toward deglobalization and increased protectionism, balkanization and relocation of distant supply chains, coupled with the aging demographics of advanced economies and key emerging markets, scares experts. Furthermore, the political backlash against income inequality leads to a scenario with strong wage growth. If this prediction is true, the spiral of prices and wages threatens a stagflationary environment worse than in the 1970s . This year is key. What vision will hit?

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Joann Kirkland
A vernacular business entrepreneur, Joann initiated her startup from scratch with experience serving various well-known firms. She loves writing and devotes her spare time writing business news for The Croatia Times.

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