Inflation in the strongest recovery since 1945

Governments should ignore siren warnings that only hyperinflation can come from pandemic-induced investments.

Inflation is rearing its head again in the public discourse, especially with soaring commodity prices. Inflation was very high in the advanced capitalist world in the 1970s and 80s, when it was destabilising and adversely affected the incomes of millions. Rapid price rises did mean big pay rises—but amid hyperinflation real wages could still fall.

Today, the international agencies agree that the economic outlook is fairly positive. The European Commission forecasts that the European Union will expand by 4.2 per cent in 2021 and 4.4 per cent in 2022 (4.3 and 4.4 per cent respectively for the eurozone). This is a big turnaround and recovery from the 6.1 per cent contraction in 2020 (6.6 per cent for the euro area). As to inflation, however, the commission projects rates of 1.9 per cent this year and 1.5 per cent in 2022 (1.7 and 1.3 per cent)—continuing to undershoot the European Central Bank’s 2 per cent benchmark.

Globally, the International Monetary Fund predicts quite a strong recovery. It expects world output, which fell in 2020 by 3.3 per cent, to rise by 6 per cent this year and a further 4.4 per cent next. Growth for the United States is envisaged to be similar and for the euro area specifically 4.4 per cent in 2021 and 3.8 per cent in 2022. Output did not fall in China last year and this year a rise of 8.4 per cent is anticipated, followed by 5.6 per cent next.

The IMF does however warn of unevenness: ‘The strength of the recovery will depend in no small measure on a rapid rollout of effective vaccines worldwide.’ With its new focus on inequality—a long time coming—it says: ‘Much remains to be done to beat back the pandemic and avoid persistent increases in inequality within countries and divergence in income per capita across economies.’

The outlook from the Organisation for Economic Co-operation and Development is of global growth of 5.8 per cent this year—a sharp upward revision from its December 2020 forecast. It notes too, though, that some countries are recovering much more quickly than others: ‘Korea and the United States are reaching pre-pandemic per capita income levels after about 18 months. Much of Europe is expected to take nearly 3 years to recover. In Mexico and South Africa, it could take between 3 and 5 years.’

Echoing the IMF, the OECD warns that ‘while vaccination rates are progressing well in many advanced economies, poorer and emerging-market countries are being left behind’. And it stresses: ‘Unless everyone is protected, no one is protected.’

Bouncing back

One reason the world as a whole is bouncing out of the recession sparked by Covid-19 is the vaccine rollout. This will be the strongest recovery since 1945 (in growth of output from the trough)—steeper than in 1945-46, 1982 or 1991.

Another reason for its strength is that governments borrowed and invested massively and subsidised private sectors to an unprecedented degree to maintain private businesses. They supported financially vast numbers of private-sector workers, so that once the recovery began businesses could restart.

We Irish had thought that, after the crash of financialised neoliberalism in 2008, the government’s rescue of the private property ‘market’ and all the private banks would remain the biggest state rescue ever. But now it has happened on a much bigger scale.

Such a recovery will raise prices. Another driver of inflation is commodity prices, which are escalating internationally. Contributing to this is the demand for clean energy. In the Democratic Republic of Congo, high-grade copper is booming because it is used in wind turbines and electrical vehicles. The energy future is electricity and copper wire is at its core—lots and lots of it.

Governments’ investment programmes are shifting to environmental sustainability, boosting demand for commodities such as copper, lithium, nickel and cobalt and other minerals used in sustainable products. Prices for copper, iron ore, palladium and timber hit record highs in May and agricultural commodities—grains, oilseeds, sugar and dairy—have also jumped.

Another spur of global inflation is China’s voracious demand for commodities and other products. China was largely outside the world market in the 1970s and 80s but is fully integrated today. The huge glut in savings because consumers have not been able to spend as much during the pandemic will also enhance demand, and so many prices, for a time.

Modest and temporary

The rise in inflation could however be modest and also temporary, according to the US Federal reserve. If the Fed were to raise interest rates too high too quickly, it could cause another recession in the US.

Larry Summers, a former Treasury secretary and influential right-wing Democrat, is highly critical of the investment programme pursued by Joe Biden since he became president, arguing that it will lead to high inflation and worse. He estimates the administration’s initial stimulus package as representing 14 per cent of US gross domestic product. Accompanied by extraordinary monetary-policy measures and with the prospect of a huge savings unwind, Summers fears the requisite response is being way overdone: ‘Now, the primary risk to the US economy is overheating—and inflation.’

But the Nobel prizewinning economist Joe Stiglitz argues that ‘whether those peddling inflation fears are pursuing their own agenda or simply jumping the gun, they should not be heeded’. A major recovery can be expected to elevate prices in the short run but that is not a bad thing because it helps oil the wheels of the economy and business.

Accelerated shift

The coronavirus crisis accelerated the shift towards digitalisation and automation, including through huge growth in e-commerce and remote working. This will increase productivity substantially and is unlikely to be reversed, helping to sustain the recovery.

But the rewards from enhanced productivity will flow to the owners of capital. Meanwhile, many workers who have been displaced must be supported and retrained. The international efforts to tax capital and profits adequately must succeed if states are to recover the costs of the pandemic supports they endowed on businesses and workers. In this new world no subsidies should ever again be given, and on such vast scale, to private firms by governments without explicit and defined returns for the long-suffering taxpayer.

The public sphere has shown itself to be the dominant force in the new world order. Its leaders must recognise this. They should adopt the ‘can do’ attitude which has been missing from progressive politics with the diminution of the state in the neoliberal era. They must negotiate and plan, with this political ambition paramount, to ensure inequality is reduced and climate repair rapidly addressed—just as with Covid-19.