Inflation: have we entered the ‘Roaring 2020s?’

IN RECENT decades, inflation hasn’t been a big issue. In developed countries it has been remarkably low, even after the global financial crisis in 2008. It has even dipped below zero, resulting in deflation in some countries. And while not as low here in South Africa, it has been pretty well kept under control by the SA Reserve Bank, only occasionally creeping above the 3-6% target range.

I wrote about inflation back in May, when the first signs of inflationary pressures appeared in the US. The commentators I quoted were generally of the opinion that the rise in inflation was temporary as economies rebounded from the pandemic – what they referred to as a “base effect”.

A quick explanation: base effect refers to the exaggerated growth, when expressed as a percentage, that occurs after an economy has taken a dive and then returns to normal. As a simple example, take a company share at R100. In a market crash it loses 50% of its value, its price dropping to R50. When the market returns to normal, the share, if it rebounds to its pre-crash price of R100, will increase in value by 100%.

While probably the majority of mainstream analysts still maintain that the uptick in inflation is transitory, others are beginning to question their assumptions, and some have even become quite alarmist.

If central banks are behind the curve in reacting to a rise in inflation, it is more likely to get out of hand, and a sudden sharp rise in interest rates to counteract it can have hugely detrimental effects on an economy. But while the South African Reserve Bank last week took steps to counter inflation by raising interest rates slightly, the US Federal Reserve is yet to do so, despite US consumer inflation reaching a 31-year high in October of 6.1%. The US Fed has, however, started tapering its inflationary bond buy-back programme.

Back in July, Berlinda Liu, director of global research and design at S&P Dow Jones Indices, questioned the “transitory” narrative. In a blog, “Will inflation actually be transitory?”, she said the base-effect explanation made sense if you were looking at yearon-year figures, but not if you were looking at inflation month by month.

“It remains to be seen whether the inflation of the past few months is only due to the reopening of the economy and pent-up demand. The US Fed’s US$7 trillion [bond] buying binge may yet finally overcome the disinflationary pressures of technological development, demographic changes, and globalisation over the past 30 years,” Liu wrote.

More recently, the Wall Street Journal’s James Mackintosh said the Fed was “running out of excuses”. “Inflation hasn’t turned out to be temporary and has accelerated, reaching the highest in a single month since January 1990. It is high even when measured against pre-pandemic prices, so this isn’t merely catch-up … it is no longer merely about a narrow set of Covid-disrupted supply chains.”

Mackintosh said investors still buy the story that inflation is transitory – though not as temporary as hoped – but “the risk is rising that the Fed has to act much more aggressively”.

A recent Washington Post article pointed out that inflation is not just a number – it has psychological consequences on consumers and workers. The article quoted Atlanta Federal Reserve President Raphael Bostic, whose concern was that “the longer inflation remains high, the more likely it is that businesses and workers begin to believe that inflation will not come back down. Then they begin to alter their habits.”

Bostic said if workers demand pay increases because the purchasing power of their money is decreasing, this leads to companies hiking prices, at which point workers will demand another pay rise. Economists call this a “wage-price spiral”, which often leads to sustained high inflation, and some believe it has already begun.

Schroders’ chief economist Keith Wade, in a deliberately provocative article,

“The view from 2030: How transitory inflation became permanent in the ‘Roaring 2020s’”,

reviews this decade using “hindsight”, as a future historian might.

“Looking back, it was clear that the seeds of higher inflation were sown before the Covid pandemic ended. What started as a ‘transitory’ rise in prices in 2021, turned into something far more persistent. With the benefit of a 2030 vantage point, it was clear that easy monetary and fiscal policy and a desire to avoid the mistakes of the past fuelled what is now known as the roaring inflation of the 2020s,” Wade writes.