Inflation – is it coming or not?

In many countries, inflation increased in the spring – especially in April. In the United States, it even rose to 4.2 percent compared with April 2020. While there is no need to panic, one should nevertheless be aware of potential inflation risks.

A large part of the currently higher inflation rates is attributable to temporary factors such as higher oil prices compared with last year. Another part probably has to do with temporary supply chain problems, especially for semiconductors. For example, this delayed car production and has probably contributed indirectly to the fact that prices for used cars have risen sharply in the United States.

Nevertheless, there is also a residual that suggests that we are seeing the beginning of – still moderate – price increases across the board, in the United States but also in a number of other countries. This does not necessarily mean anything bad at all. On the contrary, it is normal for prices to rise during an economic recovery – a rapid economic recovery would be very desirable in order to limit the economic damage after the pandemic and, for example, to minimize the social damage in the form of prolonged unemployment. For this reason, I have always been someone who has supported quite generous fiscal packages. Nevertheless, it is also extremely important to identify possible inflation risks early enough and to keep an eye on them. In some cases among policy-advisors, this is still not done enough.

So, to a certain extent, somewhat higher inflation is a good sign, because it indicates an economic upswing. It is quite possible that in the past inflation was somewhat too low – just as economic development in many countries – such as the USA – was subdued. Nevertheless, caution is also warranted. Some seem to downplay the potential problems of too high inflation in the future. This is a mistake in my opinion. Precisely in order not to jeopardize the economic recovery and to rightly point out that inflation in spring 2021 is in part only temporarily quite high, central banks should signal that they take price increases seriously – especially in the United States. This would strengthen the credibility of central banks and allow them to aim for sufficiently high inflation in the future without jeopardizing the economic upswing. One kind of worst-case scenario is if inflation were higher than expected even in the summer and then the central banks – for instance, the Fed in the U.S – had to rush to initiate a significantly less expansionary monetary policy.

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