Price pressures in a post-pandemic world
Is inflation getting out of control?
Price pressures seem to be everywhere these days. The pandemic lulled us into a sense that the stop-start economy was here to stay. With economies now beginning to reopen, demand pressures are intensifying. That’s a good thing; but supply isn’t keeping pace. Normally, we sneer at the notion of too much growth; surely, we can accommodate that kind of problem. Well, we’re not doing so well at the moment, and price pressures are mounting. Is inflation getting out of control?
Lots of people seem to think so and it’s often the first question I’m asked by business audiences these days. More broadly, Purchasing Managers’ Indexes (PMI) are indicating rising inflation worries. The manufacturing PMI saw prices spike to their second-highest reading on record in the last few months in both Canada and the United States. Consumers in Canada seem to be anchored at the 2% level, but in the U.S. inflation expectations are rising to levels not seen in a long time.
Why does that matter? Ask any central banker, and they’ll say without hesitation that managing inflation expectations is critical when it comes to price stability. Those nasty and unforgettable moments of sky-high interest rates at the end of the 1970s and 1980s were all about getting expectations down to the mid-point of the inflation target range. And once there, it’s so much easier to keep them there.
That’s the argument some use to say that today, we’re OK. They argue that almost four decades of stable prices have well and truly anchored our expectations around 2%. That’s true—but the outsized inflation of the 1970s and early 1980s followed a significant period of stable prices—it didn’t seem to take much for prices to zoom upward then. Could it happen all over again?
Central banks generally see current inflation as temporary. The economy is restarting, we had enough capacity pre-COVID-19, so we’re just in a transitory period where getting supply chains up-and-running isn’t as easy as was perhaps generally expected. By and large, we concur—this is good reasoning, and in time, when it’s clear that we’re beyond the stop-start of the pandemic period, we can pull out all the stops and fill orders as we did before...
This was excerpted from a 10 June 2021 commentary by Peter G. Hall of Export Development Canada.