Inflation has suddenly become a dominant issue that is unlikely to go away anytime soon.
It is controversial whether the recent increases in the rate, which for many years did not even reach 2 percent, are only of a temporary nature and can largely be explained by the rapid exit of the global economy from the gloom of the pandemic.
This view undoubtedly describes the majority opinion in the professional world, which can refer to historical models.
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When the previously subdued and partly regulated demand for goods exploded in the United States after the Second World War and price controls ended, the inflation rate jumped from 2 to 20 percent in a short time. In the years that followed, it fell back to 2 percent. In the course of German reunification, an economic boom caused the inflation rate to rise to a good 5 percent; but only a few years later the rate had fallen back to 2 percent. A more recent example is provided by the economic recovery after the financial crisis of 2008 and 2009: At that time, the inflation rate rose to 5 percent in some countries, but the phenomenon remained temporary. It's true: sudden spikes in inflation don't have to be permanent.
But they can last.
A minority opinion is convinced that today's inflation will not go away again quickly.
Representatives of this view include the usual crash prophets, notorious nonsenseers and dogged opponents of the euro as well as a number of respected economists who consider a development like half a century ago to be conceivable.
In the sixties of the 20th century, starting from the United States, higher inflation rates spread, which in the seventies also reached Europe and, among other things, resulted in the collapse of the world monetary system of that time.
Which theory is best?
It's easy to talk now; however, the future is not predetermined. But it would be a step forward if conditions could be defined under which inflation would disappear or remain plausible from an economic point of view. In this sense, Ricardo Reis, one of the most respected experts from the academic scene, has recently warned against baseless speculations about the further development of inflation.
Instead, he has called for economic theory to be consulted in order to learn more about inflation processes and their dangers. The advice is undoubtedly very good. But what theory should it be? In addition to the theory that has dominated textbooks for several decades, there are alternative explanations. Despite all the differences, they all share one conviction: people's expectations will play a key role in future inflation. And people's expectations depend to a large extent on the credibility of monetary policy and fiscal policy. The prevailing economic theory, to which Reis is also indebted, is a prime example of the alienation between what economists do and what many interested laypeople believe economists should do.Many laypeople are convinced that currency depreciation has something to do with the money circulating in the economy. In the economic theory that has dominated for decades, money does not appear explicitly at all.