Russia (bbabo.net), - The world economy is going through, to put it mildly, an unusual period: there has not been such high inflation in developed countries for forty years. If earlier world central banks responded to the price shock by raising interest rates, then for now they still keep them at historically low levels. The uniqueness of the situation lies in the fact that the central banks of developed economies, accustomed to worrying about too low inflation, turned out to be completely unprepared for sustained high price increases.

For almost a year, the world's key central banks believed they were dealing with a temporary surge in inflation as a result of the pandemic crisis, which would soon "resolve" by itself. But time passed, and instead of the expected slowdown in inflation, it spins up more and spreads more widely into the economy. In the US, annual inflation is about 7.5%, in the euro area and the UK - above 5% with target levels of 2%. Such inflation has not been observed there since the 1970s and 1980s.

In general, a sharp rise in inflation in developed economies is not the first time.

The United States has experienced several periods of high inflation in its post-war history. In different periods, they were caused by different reasons: both failures in logistics, and rising prices for oil and other goods, overheating of the economy. The current rise in world prices is reminiscent of the early years after World War II, when US inflation accelerated due to disruptions in supply chains. "Now, disruptions in the supply chain have also become one of the main reasons for the acceleration of world prices, with the only difference being that in the 1940s these disruptions were caused by the shift of the economy to the production of military goods, and in our time they are associated with the corona crisis restrictions," - says Evgeny Grankin, senior analyst at Gazprombank's Center for Economic Forecasting.

One of the main reasons for the growth of global inflation is the unprecedented scale of anti-crisis stimulus measures in developed economies after the pandemic, said Olga Belenkaya, Head of the Macroeconomic Analysis Department of FG Finam. The US Federal Reserve System (FRS) and the European Central Bank (ECB) doubled their balance sheets in two years. Zero or negative interest rates, active quantitative easing programs have been used by central banks since 2008 (and de facto did not stop) and increased the prices of raw materials and financial assets, but did not lead to acceleration of inflation in the real sector.

But this time, a lot of things came together. More than 13 trillion dollars in the world was sent to fiscal stimulus, including direct payments to the population - and this money was already sent directly to consumption. “Due to the pandemic, lockdowns, restrictions on mobility, the transition to work, education and consumption online, the structure of consumption has shifted from services to durable goods, the demand for computers and telecommunications equipment has significantly increased. On the other hand, the epidemic and lockdowns have led to a disruption of the existing global production and transport chains, a shortage of workers. So there was a situation when the production of semiconductors in the world increased by 25% last year, while at the same time there is a decline in car production and the inability of Apple to meet the demand for gadgets due to the notorious shortage of chips, " Belenkaya says.

Naturally, a shortage of goods on the market can be beneficial to those who can take advantage of price increases, thereby compensating for the decrease in physical sales volumes. But the problem of shortages cannot be solved quickly, because, first, in some sectors (for example, microelectronics) production capacities are usually "contracted" for a certain period, and there is some forced waiting time, says Grankin. “Secondly, countries still periodically tighten quarantine measures, so new supply chain disruptions continue to arise,” the expert points out.

For almost a year, the world's central banks believed that the inflationary surge would "dissolve" by itself

Extremely high inflation in developed countries will last at least until mid-2022, and its peak can be passed already now, Belenkaya admits. As expected, during the year it will decline - due to the weakening of fiscal stimulus, the beginning of the normalization of the monetary policy of the largest central banks, as well as the gradual expansion of "bottlenecks" in the production and transport chains. “But even after the easing of supply-side price pressures, demand-side pressures in advanced economies (accumulated savings, labor shortages and the associated wage growth) may persist for some time. Record-breaking since 2014 oil prices, and with the continuing rise in the cost of food in the world, besides, supply disruptions may last longer than expected," Belenkaya believes. According to her forecast, by the end of the year inflation in the US will be above 3%, in the Eurozone - above 2%.The main negative consequences of inflation are a decrease in real incomes of the population, a significant increase in the cost of basic goods (food, gasoline, electricity), an increase in economic inequality, and an increase in social tension. At the same time, one of the consequences of the pandemic has been shifts in the labor market, as a result of which there is a shortage of labor resources. Companies are forced to compete for workers by offering them higher wages, further fueling the inflationary spiral, Belenkaya says.

Central banks have long been too complacent about inflation. But recently, the head of the US Federal Reserve, Jerome Powell, said that now the economic situation and inflation in the US give reason to reduce excess monetary stimulus much faster than the Fed did in the previous period of monetary policy normalization (in 2015-2018). In March, the Fed will completely curtail the quantitative easing program and begin raising rates, and it is possible that for the first time since 2000 the first step of raising can immediately amount to 0.5 percentage points (now the Fed's base rate is de facto zero: 0-0.25%) . In addition, after the start of the rate hike, the process of reducing the Fed's balance sheet can be started.

The ECB will complete its anti-crisis program in March, which will lead to a gradual reduction in the volume of assets it buys under quantitative easing programs. “The risk is that, in the face of overheated asset prices and record post-pandemic debt burdens by governments and corporations, the Fed’s rapid tightening of financial conditions could lead to a collapse in financial markets, provoke crises in the “weak links” of the global economy and increase the risks of a recession in United States - in this case, the Fed will have to adjust the policy," says Belenkaya.

While moderate inflation boosts the propensity to consume and boost economic growth, she says, high inflation reduces purchasing power over time and can trigger a recession. The same applies to inflation's ability to "erode" a high level of public debt - as long as the government can finance budget deficits by borrowing at negative real rates, inflation seems to be beneficial. "But at the same time, high inflation leads to a slowdown in economic growth, a drop in real incomes, and an increase in social discontent," Grankin emphasizes.

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