The current price increases are only temporary, that was the credo for a long time.
Experts are now starting to think differently.
This article is from Trouw. Every day a selection of the best articles from newspapers and magazines appears on NU.nl. You can read more about that here.
This article is from Trouw.
Every day a selection of the best articles from newspapers and magazines appears on NU.nl.
You can read more about that here.
The specter of inflation, how afraid should we be?
The fact is that price increases are flying around us - especially in the energy sector but also elsewhere, such as in the hospitality industry.
The question is how long that situation will last.
The International Monetary Fund (IMF) assumes that prices will level off again next year, it announced on Wednesday.
But, the IMF admits, that is not certain.
A new estimate shows that inflation in Western countries will peak this autumn at around 3.6 percent.
Next year, according to the think tank, that would fall back to the pre-corona level of about 2 percent.
Still, the IMF is anticipating longer-term inflation, for example if the current supply problems in some sectors persist for an unexpectedly long time.
Until recently, policymakers at the major central banks proclaimed almost in unison that rising inflation is temporary.
By emphasizing that inflation would decline on its own, the European Central Bank and the US Federal Reserve had good reason to maintain their support packages.
The fear is that quickly phasing out these could disrupt the economy unnecessarily.
But now there is gradually more room for a different sound, say experts who closely follow the speeches and notes of central bankers. "Last summer they were still 200 percent convinced that these were temporary effects," said Edin Mujagic, macro-economist at OHV Asset Management. "Now I see the doubt arising." Bert Colijn of the economic bureau at ING: "You notice that some people are starting to get a bit clammy. They wonder: how sure are we really that high inflation will not become structural?"
These clammy hands are partly due to the extreme price increases on the energy market.
The gas price in particular is through the roof: it has risen by 60 percent in the past two days.
In the short term, this will push inflation figures up sharply: gas and electricity are fairly prominent in the product basket used to measure average price increases.
However, there is also a lasting effect, says Elwin de Groot of Rabobank Research.
"Industrial companies, such as a factory that smelts aluminum, will pass the higher price they have to pay for gas on to their customers."
De Groot recently calculated how much a higher gas price ultimately increases inflation.
An approximate price increase of 20 euros per megawatt hour will lead to an inflation increase of 0.5 percent after less than a year.
Important: the labor market
Even more important for an inflation estimate is the state of the labor market. How many people have a job, and for what wages? Due to the temporary high inflation of the moment, unions will demand higher wages to compensate for that inflation, Mujagic says. "That gives people a higher fixed income, which means they have more to spend." As a result, there is more demand for products and services, which can increase the price. "That's how unions anchor inflation. They turn something temporary into something structural."
It's just very difficult to make predictions about that.
Who knows, there may be no room at all for wages to rise as soon as companies no longer receive government support.
"Consumers then have to contend with higher energy prices while they do not earn more," says Rabobank's De Groot.
"They can then buy less, which actually brings inflation down. It can really go two ways."
Interest rate hike
Colijn doesn't see those wage increases really getting off the ground yet.
"Recently, one of the largest trade unions from Germany came up with its wage demand: 4.6 percent. That sounds a lot, but previously they demanded much more."
On the other hand, says Colijn, partly due to the reopening of the economy, the European labor market is suddenly very tight.
This helps employees to enforce higher wages.
Typically, interest rates on loans and bonds rise in line with inflation, and economists are seeing that happening to some extent.
This is very good news for insurers and pension funds, as they need to save up much less capital at higher interest rates so as not to get into conflict with regulators.
This is less good news for governments that want to borrow cheaply on the capital market.
But, say both Colijn and De Groot, despite the small increases in recent weeks, interest rates are still historically low.Keywords: