Eighteen months later, demand is booming. Consumers have a lot more money in their wallets than a year ago because they didn’t spend much in 2020. Businesses too are buzzing again and need energy and raw materials to run their factories and deliver their products on time.
But the real problem lies on the supply side. The persistent disruption of supply chains linked to COVID means that there just isn’t enough stuff, or you can’t get it as fast as you’d like. When you can, it gets more expensive, and as the extra costs go up, the price of everything goes up.
For example, a new car has become a luxury around the world due to a global semiconductor shortage. If you are looking for a new home or want to build a factory, prices are skyrocketing and projects are falling behind as building materials – especially from overseas, which is the case. in most countries – are rare and will take longer to acquire.
Meanwhile, inflation is quickly becoming a global political puzzle.
Most Brazilians accuse President Jair Bolsonaro of the rising cost of living. In Turkey, President Recep Tayyip Erdogan has already sacked two central bank governors since the start of the pandemic because they opposed the big stimulus spending he needs to stay popular as the country’s currency collapses and that inflation remains high. Tunisian President Kais Saied is also feeling the heat after having had little success persuading companies to lower their soaring prices.
US President Joe Biden’s ambitious plans to expand the country’s social safety net could be thwarted by moderate Democrats who fear investing $ 3.5 trillion now, further boosting inflation as the economy shrinks. stabilizes and that Republicans are on their side. But there is also a bipartisan generational divide: A survey commissioned by the Federal Reserve shows that retired baby boomers – many of whom are still traumatized by the 1970s ‘stagflation’ period of low economic growth coupled with high inflation. double digits – are much more concerned about inflation than younger people. Americans.
Still, there is not much that can be done at this time to address the problem on the supply side. Central bank interest rate hikes could temper demand, removing some of the price pressure, but it won’t move the needle on inflation from messy supply chains while COVID persists.
Moreover, when governments intervene on the supply side by restricting the exports that other countries need, for example Argentinian beef or Russian wheat, it makes matters worse because such distortions can provide some relief in the short term but in the long run only increase the demand – and therefore cost everyone. (This, along with several climate-related droughts, explains why global food prices are now rising at the highest rate since 2007, when food riots sparked a wave of social unrest in parts of Africa and Africa. ‘Asia.)
Inflation clearly wasn’t a blip, but most economists say we shouldn’t panic (yet). Inflation, they say, will likely return to target levels once the pandemic is behind us. But as long as COVID remains, its disruptive effect on all economies will also remain. So maybe the way out of today’s inflation is to get vaccines everywhere.