The reality of inflation

A generalized and sustained growth in prices, defined as inflation, is one of the main economic imbalances that distort the allocation of resources to a greater extent, moving in most cases to the final consumer.

From a theoretical point of view, all inflationary processes are monetary as they are generated by an increase in the amount of money in circulation; if it does not increase, there are no price increases, but no growth.

The monetary policy of central banks tries to control inflation, but allows the necessary increase to favor economic growth. Thus, the Banco Central European (ECB) targets a maximum inflation increase of 2% to ensure price stability. Although, it has recently been relaxed through an ultra-expansive monetary policy, which does not seem the most appropriate to guarantee confidence in the system.

Now the economic causes The ultimate effects of inflation can be demand, cost or structural in nature.

The demand inflation it is produced by an increase in demand, without being accompanied by a supply response. In the current situation, the supply cannot respond to the increase in demand due to the lack of some goods; which has a negative impact on production chains. As an example, the shortage of electronic microchips, which has led to shutdowns in auto plants or fiberglass.

For its part, cost inflation it is caused by a real mismatch between wages and productivity, that is, an increase in wages higher than productivity gains. Currently, public subsidy policies discourage work, leading to a lack of labor and an increase in labor costs. Likewise, the rise in the prices of oil, natural gas and some raw materials have a negative impact on production costs.

According to the INE, the Industrial Price Index reached its historical maximum in July 2021 with a general 15.3%, mainly due to energy -33.5% – and intermediate goods -14.9% – due to the prices of oil refining and raw materials such as iron, steel and ferro-alloys.

At the European level, the euro area experienced a year-on-year increase of 12.1% compared to 12.2% for the whole of the European Union for the same period. These increases clearly affect final consumption and, therefore, families.

In addition, the price-wage inflationary spiral has already begun, understood as those increases in prices and wages necessary to try to maintain the margin on sales and the purchasing power of salaries, generating a multiplier effect on the price level.

In this sense, aluminum has become more expensive by 46.10% so far this year, while Petroleum, wood and copper have risen 43%, 400% and 22.25% respectively. For its part, natural gas has gone from $ 3.5 per million BTU to $ 15. Regarding international trade, the cost of freight between Spain and Asia has risen almost 300% to date.

Also, environmental measures such as reducing C0 emissions2 they are structurally increasing the cost of the processes. In the period between August 2020 and 2021, it has increased by practically 100%, from 28 to 56.2 euros / tm Co2.

The effects have soon been reflected in increases in national CPIs; USA has experienced an interannual CPI of 5.2% in August, compared to 3.9% in Germany, 3.3% in Spain and 3% in the EMU; starting from levels, in most cases, negative at the beginning of the year.

Consequently, differential inflation positions the European region in a favorable context compared to the US. At the internal level of the EMU, Spain will experience a loss of competitiveness, resulting in an increase in imports and a reduction in exports and, therefore, the loss of the importance of the foreign sector for our country with lower growth and its consequent destruction of jobs.

To deal with the risk of “Stagflation”, central banks will be forced to initiate a restrictive monetary policy and governments will have to significantly moderate public spending on fiscal policy. They should also promote greater competition in the markets for goods, services and productive factors, especially in the labor area, in addition to reducing public debt.

If these measures are not taken, inflation will increase the distortion in the allocation of resources, depreciating the currency and restricting growth as interest rates rise, penalizing lower incomes through the loss of purchasing power and reduction of the savings rate. In short, the high public debt and rising inflation They represent the main burdens that can limit the economic recovery. It is an antisocial imbalance.

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