Is inflation ‘transitory’?

Is inflation ‘transitory’?

What does it mean that inflation is “transitory”? In a sense it means that its duration will be short enough so as not to permanently affect economic behaviors and inflation expectations. If inflation expectations are strengthened, production costs will increase and this increased cost will be passed on to the final prices, which means that inflation will cease to be transitory and become a self-sustaining phenomenon.

Until recently, the US Federal Reserve and the European Central Bank agreed that inflation is a “transitory” phenomenon that will deflate in mid-2022 and begin to lower toward the 2% range. Things have changed since last Tuesday.

Shortly after Fed Chairman Jerome Powell secured his second term, he stated that it’s time to retire the term “transitory” when discussing the current US inflation trends. “We tend to use [transitory] to mean that it won’t leave a permanent mark in the form of higher inflation,” he said during a congressional hearing. “I think it’s probably a good time to retire that word and try to explain more clearly what we mean.”

Powell is not just talk. Rising interest rates are on the horizon. To this end, he announced that the Fed will discuss accelerating the timetable for the tapering of monthly bond purchases (issuing new money) a few months earlier than mid-2022.

The ECB currently insists that inflation is transitory, despite climbing to 4.9% in the eurozone in November – above even the most pessimistic forecasts. This view will raise the temperature at its crucial meeting on December 16, where the future of the Pandemic Emergency Purchase Program (PEPP) and the regular quantitative easing program will be discussed. The future treatment of Greek bonds will also be discussed.

As is well known, the ECB buys Greek bonds under the emergency program. Will these bonds be included, conditionally, in the regular quantitative easing program? The recent messages sent by ECB executives are not clear and foreshadow a difficult debate with an ambiguous result.

The latter is a particular issue of great importance to the country. But the rise in inflation is important for the country, one way or another. Not just for the economically weaker households. It also marks a rise in interest rates and suggests that it is only a matter of time before borrowing costs rise, both for the Greek government (in the part of the debt that has a floating interest rate as well as for the next new bond issues) and for private companies.

For a heavily indebted country like Greece, this variable is critical, as it can upset the bigger picture – and it is not the only one. We should include the erosion of business competitiveness by rising costs: Rising electricity and gas prices alone burden Greek industries with production costs of 150 million euros each month.

In a normal country, these issues would be the subject of discussion, and there would be a search for answers and reflection in a spirit of national consensus. However, it is not and it is rather unlikely that they will be discussed in the prolonged pre-election period that our country is currently going through.

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