BY SWAHA PATTANAIK

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% 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.

Its four-decade high of 6.8% in the United States and 4.9% 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 U.S. inventories were up 11.5% 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. In the United States, for example, the number of people quitting and the so-called quits rate both hit record highs in September. Euro zone unemployment has been more stable through the pandemic, but some sectors nevertheless face staff shortages as labour force participation rates take time to rebound.    

Central bankers are biding their time in the hope that wage inflation won’t be either too hot or too cold. But that’s another fairy tale altogether.

First published Dec. 10, 2021