Is global inflation here to stay?

The period that began with the Covid-19 pandemic brought with it so many uncertainties. The cost of this uncertainty, which is being experienced at a time when financial markets are so intricate and the news flow is so intense, is rising with every passing day. Meanwhile, it is still way too early to see what lies ahead because, on the one hand, the pandemic is still far from being a thing of the past, and on the other, the risk of permanent damage to the global economy is still far too real.

Since the outbreak of the pandemic, there is a general consensus that the global inflationary pressure will be temporary. I largely agree with this view. However, as the uncertainties specific to the pandemic persist, more opposing views start to take root. 

For example, supply and logistics problems that unfolded after the simultaneous supply-demand shock are pushing prices up. The "chip crisis" affected the automotive industry deeply as many large manufacturers had to halt production. Of course, another factor is sticky prices.

According to the empirical findings in the economic literature, the responses of firms to price fluctuations are asymmetrical. In other words, as we see in practice, if the movement in prices is up, the reflection is faster, while the reflection of the downward movements is usually slower. Fears are increasing that this situation will become much more evident post-pandemic. 

When we look at things through this lens, there is a real risk that global inflationary pressure will not be temporary but rather permanent. Of course, markets have not yet factored in this possibility. Institutions such as the IMF and the World Bank, which steer the global economy, so far remain calm on this issue. However, if they, too, start to get a whiff that global inflationary pressure may be permanent and if Covid-19 variants reduce the efficacy of vaccines, they may start to sound the alarm for the global economy.

The prevalent view at this juncture is that the inflationary pressure the world is currently facing is temporary. If that remains the case, then it is necessary to continue to prioritize supporting economies. However, if more signals indicate that global inflation is here to stay, it is likely that developed countries will take drastic measures. Of course, this is not good news for emerging economies like ours.

However, no matter what scenario ends up materializing, we must not forget that the fight against inflation should be supported not only through monetary policies to reduce aggregate demand, but also by structural ones that aim to reduce financing and input costs that force producer prices to tick upwards.