How long will COVID-fueled inflation last?

Everyone is talking about inflation these days. Rising prices affect people from all walks of life, all over the world.

In the United States, buying a used car now costs on average 45 percent more than in January. Europeans are bracing for a harsh winter with soaring natural gas prices coming at the worst possible time.

Asian investors noted the word “inflation” calls on this quarter most often since 2003, when the SARS epidemic hit the Chinese economy. In Lebanon, whose annual inflation rate is now the highest in the world, exceeding In Venezuela and Zimbabwe, most people buy local not to support local businesses but rather because they cannot afford to import.

Inflation, however, is not always bad and is actually a sign of a healthy economy as long as it stays around 1.5-2% per year. But now in most countries it’s growing too much due to the economic fallout from the ongoing pandemic.

Eighteen months later, demand is booming. Consumers have a lot of 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 businesses. factories and deliver their products on time.

But the real problem lies on the supply side. The continued 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 delayed because building materials – especially those coming from abroad, which is the case for most countries – are rare and will take longer to acquire.

Meanwhile, inflation is quickly becoming a global political puzzle.

Most Brazilians blame President Jair Bolsonaro for the increase in their 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 while the country the currency collapses and inflation remains very high. Tunisian President Kais Saied is also feel the heat after having had little success in persuading booming companies to lower their prices.

US President Joe Biden’s ambitious plans to expand the country’s social safety net could be thwarted by moderate Democrats who fear they are now investing $ 3.5 trillion more inflation just as the economy stabilizes, and Republicans have their side. But there is also a bipartite generational divide: a investigation commissioned by the Federal Reserve shows that retired baby boomers – many still traumatized by the 1970s “stagflation“Period of weak economic growth coupled with double-digit inflation – are far more concerned about inflation than younger 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.

In addition, when governments intervene on supply by restricting exports that other countries need, for example Argentinian beef Where russian wheat, this makes matters worse because such distortions may provide some relief in the short term, but in the long term only further increase the demand – and therefore the costs for everyone. (This, along with several climate-related droughts, explains why global food prices are now rising at highest pace since 2007, when food riots sparked social unrest in parts of Africa and Asia.)

Inflation clearly wasn’t a blip, but most economists say we shouldn’t panic (yet). inflation, they to 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.

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