The Inflation Surge of 2021-22: Scarcity of Goods and Commodities, Strong Labor Markets and Anchored Infl ation Expectations

Ángel Ubide
ZBW – Leibniz Information Centre for Economics/CEPS – Centre for European Policy Studies, 2022
Level: expert
Perspectives: Neoclassical Economics, Post-Keynesian Economics
Topic: Labour & Care, Macroeconomics
Format: Working paper/Journal article

The article discusses multiple dimensions of the recent surge in inflation in a detailed way. It employs a Phillips curve-oriented approach applied to the Eurozone and the United States. Three dimensions are discussed: excess demand relative to the supply triggered by the end of the lockdowns and reduction in unemployment rate (below the inflation 'neutral rate'), ongoing supply shortages due to pandemic-related and geopolitical reasons causing rising energy and input prices, and finally inflation expectations. The author argues inflation has become widespread across sectors, and wage demands could potentially start a wage-price spiral (though low levels of unionisation reduce that risk in the US). In terms of policy recommendation, particularly for the US, a policy mix of tightening monetary policy and a fiscal policy of compensating income losses is recommended.

Comment from our editors:

Ubide's article combines a New Keynesian analysis with Post-Keynesian elements, rendering his contribution to the inflation debate very useful for comparative studies: By employing a Phillips Curve approach, he takes up the central element of contemporary New Keynesian macroeconomic analysis when it comes to explaining inflation, yet by discussing the role of expectations and levels of unionisation, his analysis gets a decidedly Post-Keynesian twist. In general terms, though, his largely uncritical use of the concept of the 'natural rate of unemployment' (or non-accelerating inflation rate of unemployment, NAIRU in contemporary macroeconomic models) is problematic in and of itself, as it presupposes a stable and reliable relationship between unemployment and wages (and thus, by extension, inflation, though that again is a theoretical leap, as Ubide acknowledges himself) that most likely isn't there (see this working paper by James Galbraith).

Apart from the Phillips curve approach as a point to be criticised, the policy mix recommended at the end of the article can be open to debate. The author does not specifically discuss a policy recommendation for the euro area, probably because a policy mix recommended similar to US is not possible as the monetary policy is centralised in the Euro area whereas fiscal policy is decentralised. Additionally, many European countries have the tradition of social dialogue in wage setting, so incomes policies play an important role in Europe for price stability, by contrast to the US.

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