Longer-lasting "transitory"...

To assume, without the shadow of a doubt, that current inflation is only driven by transitory phenomenon looks like an always bigger leap of faith

It has been almost a full year since a global inflation shock emerged. All regions are impacted one after the other by a similar combination of commodity price rises and various supply constraints, following the global economy stop-ang-go.

That should bring one question: what part of it is permanent?

The consensus assumption is for a temporary shock: is it justified or is it a failure to conceive something else than "back to previous state" post-COVID?

Not to blame anybody, but the Sept-21 ECB projections report just released offers a typical illustration: the central bank does acknowledge supply "bottlenecks" or "constraints", it does reckon these are "more persistent" than previously expected, but it falls short of considering these shocks could become permanent.

The doubt, however, should be allowed, considering for instance that:

  • trade barriers (of all kinds, not just tariffs, and not seen in decades) seem here to stay
  • the almost 40-years old just-in-time flow model is now questioned
  • the labor force seems much less mobile than it was pre-2020
  • the carbon emission price (a negative externality) needs to find its way through goods and services

From a theoretical point of view, each of these developments could be considered a structural (permanent) shift.

One can't understand the global chip business bottlenecks without taking into account the trade war. To simply assume that it will revert at the end of COVID, whenever that is, is not what industry specialists and practitioners have in mind.

In that context, to not even consider a durable supply-side shock could be at play, to some degree at least, is the strong assumption here.

Now, if the situation really could be qualified as a negative supply shock, central banks would have to take for granted that potential output is lower and that the non-inflationary rate of unemployment is higher, for instance. Though uncomfortable this may be, tighter monetary policy would be warranted to avoid inflation to break higher, for longer.

How does our data help in that context? It keeps track of all idiosyncratic inflation shocks. If and when these reverse, our Inflation NewsBot and News Inflation Pressure Indices will capture the turning point in a timely fashion, as they did the other way around. For now, signs of reversal are scarce. Inflationary pressures may be a touch less acute than they were three months ago (in the US, mostly) but the global "temporary" supply-side shocks are still very much in play.