Wednesday, January 26

Hyperinflation or just higher inflation?

Rising costs for everything from fuel to computer chips to houses and even spinach makes some people worry about the specter of “hyperinflation,” the phenomenon in which skyrocketing prices destroy the value of banknotes and coins of a nation.

Google searches for the term have skyrocketed in recent days, after Twitter Inc. CEO Jack Dorsey set the social media platform ablaze with a comment that hyperinflation is “happening,” prompting responses. from the likes of Cathie Wood and Tesla Inc of Ark Investment Management. . it’s Elon Musk.

It’s a term that conjures up sepia images of wheelbarrows full of cash and bread lines, yet rampant price increases are still a problem for countries like Venezuela today. Less so for the US and the world’s other major economies, where talking about hyperinflation runs the risk of overshadowing a much more tangible concern: run-of-the-mill inflation. While the gradual price increases reflect a healthy and growing economy, the abrupt rebound as the world reopens from pandemic-induced lockdowns has led to political anguish, a dilemma for central banks and a revision of the prices of financial markets.

Here’s why you should worry about inflation, but not hyperinflation.

So how much inflation is there?

Annual changes in the cost of living are the ones that are increasing the most in a decade, with a measure of global inflation compiled by the International Monetary Fund predicting that price increases in 2021 will be the steepest in a decade. With no one going to the mall to buy products in 2020, prices have either plummeted or stabilized, making recent increases compared to last year look bigger and feel doubly painful for consumers. An American indicator has risen more than 5% this year for the first time since 2008, Brazil’s inflation has exceeded 10%. Turkey may report an annual rate of 20% next week.

Still, we are a long way from the highs of the last century. American consumers saw an inflation peak of just under 15% in 1980, while the IMF’s global gauge surpassed nearly 40% in 1993 amid the fallout from the collapse of the Soviet bloc.

What Causes Inflation?

This thorny question has plagued economists for decades. One favored theory focuses on an imbalance between supply and demand. Too little supply of goods or services combined with too much consumer demand is supposed to cause prices to skyrocket. And too few workers to meet the demand for their services raises wages, also known as the cost of labor, which also drives companies to raise their prices. This is what appears to be happening today as the world opens up to pandemic lockdowns.

Another popular theory focuses on the money supply and the idea that too many bills in circulation eventually mean higher prices for the finite supply of goods and services; Milton Friedman said that it is always and everywhere about money. The problem is that you can end up saving money or that inflation can mainly affect financial assets rather than costs in the real economy. Inflation has eluded Japan for years, for example, even though the country’s monetary base has more than quadrupled since early 2013.

How is hyperinflation different?

Hyperinflation occurs when inflation becomes so rapid that ordinary households find it impossible to cope without their lives getting substantially worse. Weimar Germany is a classic example, where a wheelbarrow of cash was needed to buy a loaf of bread. Or think of post-Soviet Russia, when the removal of price controls meant that families’ lifetime savings barely covered the weekly grocery bill. More precisely, the term is often used when consumer prices increase by 50% a month or more. Obviously, that is well above the current situation in the major economies.

One reason for current concern is that most of the hyperinflationary episodes of the past few centuries took off after governments or central banks printed massive amounts of money, be it to finance wars, pay large severance payments after losing a , or as a result of productive losses. ability destroyed in fighting. While tackling Covid-19 is not a conventional battle, it has meant a huge increase for public spending. And central banks ran their (virtual) printing presses at breakneck speed to support those disbursements. Central banks in the US, Japan and Europe have increased their combined balance sheets by more than $ 10 trillion since the pandemic began to exceed $ 24 trillion.

How worried should people be?

So far, the answer seems to be that inflation is perhaps a concern, hyperinflation not so much.

Rapid growth in the money supply is already slowing, and the rate at which that cash moves through the economy has plunged to multi-year lows. That’s important because excess money will only drive up prices if it’s used to buy goods or services. Governments such as the United Kingdom and the United States are also cutting, or preparing to cut, the amount of debt they sell to finance the recovery from the pandemic, further reducing excess liquidity.

And even the sell-off of government bonds in more than a decade comes with a ray of light for anyone who is afraid inflation will spiral out of control. Driven by rising short-term yields, central banks are considering raising interest rates in an attempt to curb inflation by reducing demand, even if doing so means a slower economic recovery. That’s why longer-term bonds are relatively quiet, with 10-year benchmark yields well below 2%.

© 2021 Bloomberg

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