Is inflation “transient”? | eKathimerini.com
Rising prices for electricity, natural gas and fuel have already raised production costs and hit Greek industries and households. [InTime News]
What does it mean that inflation is “transient”? In a sense, this means that its duration will be short enough not to have a lasting effect on economic behavior and inflation expectations. If inflation expectations strengthen, production costs will rise and this increase in costs will be passed on to final prices, meaning that inflation will cease to be transient and become a self-sustaining phenomenon.
Until recently, the US Federal Reserve and the European Central Bank agreed that inflation is a “transient” phenomenon that will deflate in mid-2022 and begin to decline towards the 2% range. Things have changed since last Tuesday.
Shortly after Fed Chairman Jerome Powell got his second term, he said it was time to remove the term “transitional” when discussing current inflation trends in the United States. . “We tend to use [transitory] to mean 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 take that word out and try to make it clearer what we mean.”
Powell doesn’t just talk. Rising interest rates are on the horizon. To this end, he announced that the Fed would discuss an acceleration of the degressive schedule for monthly bond purchases (issuance of new money) a few months before mid-2022.
The ECB is currently insisting that inflation is transient, although it climbed to 4.9% in the eurozone in November – above even the most pessimistic forecasts. That point of 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 we know, the ECB is buying Greek bonds as part of the emergency program. Will these obligations be included, conditionally, in the regular quantitative easing program? The recent messages sent by the leaders of the ECB are not clear and point to a difficult debate with an ambiguous result.
The latter is a particular issue of great importance to the country. But rising inflation matters to the country in one way or another. Not just for 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 rate floating interest rate only for the next new bond issues) and for private companies.
For a heavily indebted country like Greece, this variable is critical because it can turn the big picture upside down – and it’s not the only one. We should include the erosion of business competitiveness through rising costs: rising electricity and gas prices alone weigh on Greek industries with production costs of 150 million euros each month.
In a normal country, these questions would be discussed, and there would be a search for answers and reflection in a spirit of national consensus. However, this is not the case and it is unlikely that they will be discussed in the long pre-election period that our country is currently going through.