The return of inflationary fear

Long a common topic of conversation and concern, inflation over the years had come to be seen as a problem of a bygone era. Until this year.

At the start of the pandemic, there were first fears not only of an economic recession, but also of a global depression which could be accompanied by a deflationary spiral in which falling prices and wages would encourage consumers and businesses to keep closed their wallets, exacerbating the crisis. In May 2020, the Consumer Price Index (CPI) was down 0.4% year-over-year, and last February it was still up just 1%. Then the measure began to rise.

Guardians of low and stable inflation, central banks – like most other experts – initially attributed the phenomenon to a simple comparison effect between the start of a return to normal and the darkest days. of the crisis, 12 months ago. It was also a question of other “temporary” factors linked to the pandemic and the restarting of economies after a forced shutdown.

In particular, we talked about a problem of an explosion in demand for certain goods, to which companies had difficulty responding with a sufficient supply. On the one hand, we had households suddenly eager to buy houses far from the big centers and greedy for bicycles, electronic devices and other goods because they could not go to restaurants or take trips. On the other hand, we had companies that couldn’t rehire staff as quickly as they wanted and struggled with supply chains continually disrupted by COVID-19. To complicate matters, the global recovery has pushed up the price of oil, at the same time as droughts and other climatic calamities ruined crops and raised food prices.

These imbalances between supply and demand have resulted in price increases all over the world. In Canada, the CPI climbed 4.7% in October and November compared to the same period last year. However, we are still far from the peaks reached in the 1970s and 1980s, when we flirted with 13%. This was before central banks were tasked with reducing, at all costs, long-term inflation to a target of 2%. Since 1991, and despite some economic upsets this fall or in 2003 (4.7%), the rise in prices has remained in Canada at an average of 1.9%, its bank said again this month. central.

The Bank of Canada continues to believe that inflation will return to around 2%, but not before the end of 2022. Although forced to admit that the phenomenon supposed to be “temporary” lasts much longer than they expected, the central bankers have stepped up the reduction of their special liquidity injection programs and are now pointing to the first hikes in their interest rates next year.

Central banks will be particularly attentive to the perception of the situation of households and companies, ready to react if the fear of inflation takes root in people’s minds. This is because, won with a hard fight, the control of inflation rests in large part on the fact that the population turned the page on the 1970s and 1980s and that its medium-term expectations remain “firmly anchored” close to the 2% target. We don’t want that to change.

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Reference-www.ledevoir.com

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