Inflation beyond forecasts

Most international analysts, economists, expert advisors around the world, did not expect that their initial forecasts for inflation will be of such duration, severity and immediate danger. The current rate will increase further, dragging prices along, preventing the much-desired growth that everyone longed after 2+ years of Covid-19 pandemic and shrinking global economic activity. Experts' forecasts expected early stabilization and a gradual decrease in prices. So what happened and the frenzied rally of a decades-long historic inflation continues?

The continuous rise in inflation on a global level -now at an average of about 9%-, has not occurred since the early '80s. The cost is already heavily affecting national economies and global markets. It did not come as a surprise that central banks are determined to raise interest rates, after years of loose monetary policy. Τhe European Central Bank (ECB) has stopped bond purchases with what this signifies for countries retaining high public debt such as Greece.

At the same time, a perfect storm of geopolitical events takes place, the war in Ukraine continuing, the resurgence of the pandemic with new mutations, it is not a hidden secret that a new global recession, which will probably start in late autumn, is perhaps inevitable. These days, Europe is shaken by a new political crisis in Italy with the resignation of Draghi and the possible final closure of the Nord Stream pipeline by Russia, which will bring a devastating winter for energy for Europe's largest economies, first and foremost in Germany.

No one could have predicted the dark perils of a chain of -seemingly independent- global events fueling inflation, instability, the coming recession, would occur in temporal continuity and simultaneously. Globalization through trade, disrupted supply chains, accelerates or decelerates economic and social developments. Government policies try to follow and cope with one shock after another, slowly depleting budgets and any plans for fiscal discipline.

Citizens receive the heavy pressure of inflation on their wallet and purchasing power every day. Inflationary pressure does not adhere to economic or social classes, as purchasing power erodes while increasing business and corporate costs eat up profit margins. Economic indicators tell an unpleasant truth. It will be difficult for prices to return to pre-pandemic levels. It is a fact that in various countries the labor unions are actively already demanding an increase in wages in order to cope with the increased cost of living, cost of energy and surmounting food prices.

We are beyond the tipping point at which a rebalancing of world markets could occur. Many countries, especially the economically weak ones (developing world), will experience a food, energy, and political crisis (see recent events in Sri Lanka). Inflation has become entrenched in mass psychology, since both supply and demand are inflationary. The sooner we plan emergency measures to deal with current and future crises, the less painful the coming economic downturn will be. Let's leave the forecasts aside and implement anti-inflationary policies like the "tightening" of monetary policy. Raising interest rates may temporarily help derail inflation. The transition to alternative, green and renewable forms of energy on a massive scale is imperative.

The psychological expectations of people and companies for future price reductions will be lost. Many retailers and importers are stockpiling products before prices rise further, to meet global demand that has emerged since the ending of lockdowns and the supply chain disruptions in Asia. Economic indicators present an inflationary picture that will stay with us for quite some time. Sit tight.

-Efstathios Kassios 

https://twitter.com/stathiskassios

www.skassios.com