The coronavirus pandemic is decreasing, but the new normal may not look the same as it did in 2019. And we are already seeing upward pressure on the prices of some goods, the inflation It is waking up and the different spending plans that are being deployed will contribute to this, converging with the reality of the rise in raw materials.
In the United States we are seeing that its CPI increased 5% in the 12 months to May, marking the largest annual increase since August 2008. The core CPI, which excludes food and energy prices, increased 3.8% year-on-year.
In this context, Spain must move the latest CPI data for the month of May rose 2.7% in its annual variation. This is the highest rate in the general index since February 2017.
This data is striking if we compare it with core inflation (general index excluding non-processed food and energy products) increases two tenths to 0.2%, which is two and a half points below that of the general CPI . It is the biggest difference between the general index and the underlying one since the latter was published in August 1986.
What’s going on? Let’s talk about the situation
To explain the great volatility in the price level, we must first say that the pandemic has been associated with a significant cycle of oil prices, which fell from roughly $ 70 in early 2020 to less than $ 20 at the end of April 2020, and then recovered to roughly January 2020 levels. A barrel of brent is already back above $ 70.
The introduction in January 2021 of a carbon tax on liquid fuels and gas in Germany also contributed significantly to the rebound in energy prices. Energy is the clear conjunctural factor and we are closer to cost inflation than to demand factors due to the gradual reabsorption of slack in the labor and product markets, in line with the recovery from the slow recovery in general demand.
Wages are not tightening. Labor markets still reveal high uncertainty regarding employment prospects. Although the rise in unemployment has been limited by the extensive fiscal support provided to businesses and workers, the unemployment rate masks a considerable direct migration from unemployment to inactivity, on the one hand, and the lifeline provided by important measures of employment. retention of employment, on the other.
It is also incorporated a factor for the composition of the indices. Spending on tourism, travel and hotels plummeted, while spending on items to work, study or exercise at home, as well as food, increased. Given that this index is adjusted in January of each year to take into account the composition of spending in the previous year, a greater weight is given to the sectors that experienced an increase in spending.
Central banks are not going to work against inflation
From the point of view of the Federal Reserve, there is no reason to worry. They assure that inflation will remain above 2% “for some time” but, for their part, it seeks to achieve maximum employment and economic growth by monitoring inflation.
Regarding inflation, they explain that since inflation has been persistently below the 2% goal in the long term, they will try to achieve inflation moderately above those levels for some time, so that inflation averages 2% over time and longer-term inflation expectations remain well anchored.
Consequently, sour general financial conditions remain accommodative. They maintain the target range for interest rates at 0% -0.25% and hope that it is appropriate to maintain this target range until labor market conditions have reached consistent levels.
They will continue to increase their holdings of Treasury securities by at least $ 80 billion per month and agency mortgage-backed securities of at least $ 40 billion per month until substantial progress has been made toward maximum employment and price stability targets.
The diagnosis by the ECB is equivalent. Do not be alarmed because inflation and would record a peak of 1.9% in 2021, driven by temporary bullish factors, before returning to rates of 1.5% and 1.4% in 2022 and 2023, since the pressures on demand remain weak and oil prices are assumed to fall. However, in just one quarter the evolution of prices for this year has been revised upwards by 0.4 percentage points, which shows the speed with which prices are moving.
Inverted U-shaped headline inflation in 2021 reflects the reversal of the VAT cut in Germany, the rebound in the rate of variation in energy prices due to strong base effects, and an increase in raw material costs associated with supply disruptions.
Germany is the one who would be most interested in monitoring inflation. Its CPI accelerates to 2.5% year-on-year in May from 2% in April, the highest level since 2011 and much faster than expected 2.3%.
On the part of the ECB, we continue with rates at 0% and net purchases under the asset purchase program will continue at a monthly rate of 20,000 million euros. It keeps the expectation that net monthly purchases will continue for as long as necessary to reinforce the accommodative impact of their official rates and to end shortly before the ECB’s official interest rates begin to rise.
But we must not be strangers to this movement. There is a cyclical movement linked to energy prices, but another with a more medium and long-term focus linked to high government spending and ultra-lax monetary policy. This is the one that should focus concerns because it could generate adverse movements, since conditions similar to previous episodes in the 1940s and 1970s are being created.
In Europe we have structural factors that invite us to think about inflation. To the well-known “Japaneseization” of our ECB with rates at 0% and recurring purchase programs, we must add the spending plans that are will boost up to 1.8 trillion between 2021 and 2027: Plurinational financial framework (1.07 trillion) and Next Generation EU (750,000 million euros).
Fight inflation? The silent way of transferring the debt to different groups
The state has been steadily going into debt since the 2007-2008 crisis, an accumulation of public deficits that have attacked budgetary stability. Governments have repeatedly bet on debt as a way to defray the costs of the crisis and maintain the high volumes of public spending.
Today the ratio of public debt to GDP in the Eurozone is 100% andn Spain, in particular, is already 120% (35 percentage points more since 2019). Therefore, there are incentives on the part of the different governments in which inflation appears to devalue that debt.
This inflation risk represents a regressive effect on lower-income families and older people in society. This happens when the prices of food and household services, such as water and heating, increase at a rapid rate.
Due to the existence of progressive tax systems, if wages increase their nominal value at the rate of inflation, many wages while maintaining purchasing power they will go to upper reaches in which the tax rate is higher and the control of wages will be increased.
Savers had already seen how the banks were hitting them with bank commissions or the demands of greater commitments with the entity for the costs. Letting go of inflation will devalue your savings.
Investors are already facing a market with valuations only comparable to the year 2000 with the dot.com bubble and negative profitability in the debt market, few options are left. A structural inflation will not allow them to turn to conservative options, but rather it is intended to catalyze existing risks. In fact, in the face of inflationary pressure, negative real rates have collapsed.
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