As the world economy has emerged from the pandemic and lockdowns, prices for goods, raw materials and services have risen sharply. In November, it was reported the UK Consumer Prices Index had hit 4.2 per cent in October, its highest level for almost a decade. In the US, consumer prices are up 6.2 per cent compared to a year ago. How much is this due to temporary factors and how much reflects longer-term government and central-bank policies?
The rising cost of energy is an important issue. In December 2020, Brent crude was priced at just $50 per barrel, but hit a peak of $86 per barrel towards the end of October. Prices for natural gas have shot up, too, from under $3 per million British thermal units (MMBTU) to over $6 in October. Not only do these rises affect costs for direct uses of energy – like household energy bills – but have a knock-on effect for the cost of everything else.
But there are many other factors affecting prices. Supply chains have struggled to cope with rising demand. In part, this is because production takes time to scale up after being placed in relative hibernation. But there are also issues due to rising demand and problems with logistics as container ships stack up outside ports, unable to unload.
New York Times columnist Paul Krugman argues that the problem isn’t an overall increase in demand but a change in the kind of things we’re buying: ‘In the pandemic era, people have been consuming fewer services but buying a lot of durable goods — home appliances, exercise equipment, etc. This surge in demand for durable goods has overstressed the ports, trucking and warehouses that deliver durables to consumers, leading to rapidly rising prices for stuff whose prices normally fall over time as technology advances.’ He argues that once supply chains become ‘unkinked’, key workers like drivers come back to work attracted by higher wages and production reflects demand better, inflation will ease off.
But others point to the growth in the money supply as a longer-term problem that isn’t going to go away. Interest rates in many major economies have been stuck at ’emergency’ levels – even going negative in some places – since the financial crisis of 2008. Moreover, central banks have used quantitative easing to push funds into the economy via banks. And state spending has gone through the roof as governments have spent heavily to cope with the pandemic. Some economists argue that these factors will mean that prices will remain higher even when short-term problems work themselves out.
Why is inflation rising and will it continue to do so? Why were many high-profile economists caught by surprise? What will be the impact of rising prices on living standards? What can governments do to get inflation down? What does the return of inflation tell us about wider problems in the economy?
partnerships manager, Academy of Ideas