WHY INFLATION MATTERS?
If you check the world news from time to time, you would have undoubtedly encountered warnings about inflation. Why is inflation a trending topic nowadays?
A high inflation rate is for sure a bad news for both consumers and producers, speaking in microeconomic terms. We know that major western economies were dealing with moderate inflation (around 2% in the US). Business owners would never want collapsing prices, as they are associated with squeezed profits, and employees won’t wish for a high inflation rate either since this would eat into their real wages.
For more than 10 years, inflation hasn’t been this debatable and that’s because the current inflation rate in the major western economies is the highest since 1990 (around 6.2% in the US).
WHY NOW?
Many questions are being asked concerning this topic and the most important one is for sure: Why are prices rising now?
Actually, since we have faced a worldwide pandemic and many geopolitical conflicts in the last 2 years, it’s irrational to blame just one factor for the rising prices. To start, it’s significantly crucial to mention the insane rise in energy prices. Since the start of 2021, prices of gasoline have surged an average of 35%. On the other hand, gas prices are soaring due to many factors. For instance, in September, Firmus Energy announced that 50,000 people in its Greater Belfast network would see their gas price increase by a third, after announcing a 35% increase to gas prices in the Ten Towns network from October.
In addition to energy prices, lifting COVID restrictions have pulled consumers back to the market to spend what they have saved due to the pandemic. Price of COVID-sensitive services (restaurants, hotels, airport services…) have increased by almost 2%.
We can’t forget the fact that the COVID-era put an end to the tax-free eras in many countries (the end of the VAT cut in Germany) which at its turn put inflationary pressures on the economy.
Failure to forecast inflation
The biggest shock to mainstream economics was the failure to forecast inflation, which means that we are left with no formula or equation to predict inflation. As Wolfgang Munchau in the FT put it: “Central bankers do not really understand how inflation works. The problem is not that somebody got a forecast wrong. We all do, all the time. The troubling bit is that these forecasts reveal a basic lack of understanding of the underlying inflation process. There is some recent evidence that globalization may have changed the inflation process. Even if true, this is not necessarily a helpful observation either. We do not know exactly what kind of period we are entering.”
The monetarist formula or the so-called neoliberalist perspective of inflation is proven wrong by reality. As the father of this Theory Milton Friedman once said:”inflation is always and everywhere a monetary phenomenon” (Milton Friedman, Inflation Causes and Consequences, Asian Publishing House, 1963.). However, from the Great Recession in 2008, money supply growth accelerated to 9.6% a year as central banks applied “quantitative easing”, but CPI inflation slowed to 1.8% a year. And the Keynesian theory is also proven wrong by history. In fact, in the 1970s, price inflation reached post-war highs, but economic growth slowed and unemployment rose (what we academically call stagflation).
To sum up, we are experiencing a historic high inflation with no scientific method to forecast it and this means that as the great depression shocked the economic thought (as Keynes said), the current inflation is shocking the mainstream economics and putting an intellectual end to the supply-side economics.