(Expansion) – The acceleration in inflation is transitory. This is what different central banks around the world have been repeating lately. Certainly, some of the triggers for the rise in prices will dissipate in the coming months, but what if households and companies begin to doubt the ability of central banks to effectively control inflation?
Inflation affects the well-being of all, and more that of those who have low incomes. When the rise in the prices of the goods and services that we consume is higher than that of our income, it is said that our purchasing power erodes, because in the end it will reach us to consume a lesser quantity and variety of goods and services, thus leaving some of our unsatisfied needs, when before we were able to cover them.
Naturally, those with lower incomes run the risk of not even being able to acquire the most basic satisfactions, such as food and basic services (water, electricity, gas).
After slowing down at the beginning of the pandemic, the price of the basic food basket in our country began to press until it reached, between last April and May, year-on-year variations of around 6%. The Bank of Mexico, responsible for maintaining low and stable inflation, affirms that the rise in prices is temporary, a mantra that almost all Central Banks in the world have been repeating. Is it true?
Certainly, some elements that have put pressure on inflation will dissipate. To begin with, there is a purely statistical effect, observable in the interannual variation and associated with a low comparison base, because, in the spring of 2020, at the beginning of the pandemic, the high in world economic activity depressed the demand for Raw materials and confinement did the same with the consumption of services, which was reflected in the prices of both, even oil came to present a negative price.
As confinement eased and activity began to recover, in the second half of 2020, prices began to rebound, so this arithmetic effect will soon be lost.
Another factor is the disparity between supply and demand. Hand in hand with significant economic support and the rapid deployment of vaccines, mainly in advanced economies, consumption in these countries has recovered faster than expected; At the same time, the production of goods and services has shown difficulties in catching up, since last year’s halt in activity caused the global supply and supply chains to be damaged, and some companies report difficulties in attracting workers.
The law of supply and demand tells us that, everything else constant, if demand goes up and supply is static, prices will increase. Now, the demand shock will gradually fade, after the initial impulse of de-confinement, and supply will gradually catch up, as the world economy finishes reopening and the shortage of inputs for production is solved.
Everything seems to indicate that inflation will slow down, but an additional factor needs to be taken into account: expectations. Usually, our expectations are fed back from the latest information we have available, so if inflation remains high for a long time, it is possible that we, the economic agents, begin to perceive the rise in prices as not-so- transitory and act accordingly.
In this situation, it would be expected that we incur in a vicious circle, in which workers demand higher wage increases (in order to maintain their purchasing power) and companies, in turn, choose to transfer the increase in their costs (wages , raw materials, etc.) to the final consumer, and so on.
If we agents trust that the Central Bank will fulfill its mandate of price stability, it is less likely that expectations will be misaligned and we will enter the vicious circle described above, but there is a risk that this confidence will be lost, something that the Banks Centrals shouldn’t take it lightly.
Therefore, at the first sign that inflationary pressures are more persistent than expected or that price expectations are beginning to loosen, strong actions should be taken.
Editor’s Note: Alejandro J. Saldaña Brito, Chief Economist of Grupo Financiero B × +. “I am a believer that success and dignity, both personally and professionally, are achieved on a day-to-day basis. Discipline is essential to fulfill the previous point, but that does not mean that we should relegate to the background the pleasures of this life (very short for those of us who are ambitious!): Living with family and friends, sports, travel, food, music and art … and some mezcal, always with measure ”. Follow him on Twitter as and on. The opinions published in this column correspond exclusively to the author.
