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The prices of many products have risen sharply at the start of the corona crisis Increased. High raw material prices and a scarcity of production and transport capacity are causing prices to rise ever higher. As a result, consumers are paying more and more for food and fuel. In the US, inflation has been above 5% for four months now, while consumer prices in the Eurozone are now rising by 3% year-on-year. In both cases, that is the highest level in more than a decade.
To date, companies have been able to pass on the higher cost of production to consumers, which continues to drive up corporate profits and stock prices. But for the real economy, the outlook looks less favourable. High prices for oil and gas and food prices have risen by a third in a year threaten the scenario of stagflation.
Stagflation occurs when inflation is high but economic growth slows down. Rising prices then have a dampening effect on economic activity. This scenario presents governments and central banks with a major challenge, as stagflation is difficult to combat. Higher inflation exacerbates the problems, while slowing the economy can lead to debt deflation and higher unemployment.
Central banks such as the Fed and the ECB have repeatedly said in recent months that high inflation was only a temporary phenomenon. The price increases are said to be the result of a disruption in the logistics chains and the opening up of the economy after all the lockdown measures. But now doubts are also starting to grow among central banks. For example, Fed Chairman Jerome Powell stated that he Struggling with the combination of high inflation and higher-than-normal unemployment. To bring unemployment down, interest rates must remain low, but that will further boost inflation.
"This is a situation in which there is a tension between our two objectives. Inflation is high and well above our targets, but there still seems to be room for manoeuvre in the labour market.", Powell said during the European Central Bank Forum. He implicitly referred to the stagflation of the 1970s. Even then, there was talk of relatively high unemployment and rapidly rising prices.
Earlier this week, Powell said in a speech to the Senate Banking Committee in the U.S. that inflation will remain high for longer than previously thought. We still have to take it into account in the coming months, but in the longer term, he still foresees a normalisation of inflation. He cites problems with logistics chains and inventories as the main cause of the rapidly rising prices.
Central banks have already indicated that they want to reduce their support measures. However, it is questionable whether this is enough to eliminate the causes of high inflation. If commodity prices - including energy prices - remain high for a long time and consumers notice this in their wallets, they will demand higher wages. This can trigger a vicious cycle of higher wages and higher prices.
This scenario is particularly unfavorable for savers, as high inflation means that money loses purchasing power faster. This is exacerbated by low interest rates, which means that savings no longer earn interest. The stagflation of the 1970s was accompanied by a speculative flight into commodities. Precious metals in particular benefited from this period, as investors already saw them as a kind of safe haven in times of high inflation. We may be heading for another phase of stagflation.
This contribution was made from Geotrendlines
