One of the reasons so many policymakers refuse to panic about inflation is that the global economy still lacks millions of jobs.
The International Labor Organization projects the global job deficit due to the pandemic to be 75 million this year. He also does not expect the gap to be closed in 2022, when he estimates that 23 million jobs will remain worldwide from his pre-Covid trajectory, even if the economies bounce back.
The Organization for Economic Co-operation and Development echoed the warning, saying unemployment will remain above pre-crisis levels in many countries next year.
With so many workers still on the sidelines, it should be more difficult for those with jobs to push for big pay hikes – even as the cost of living is rising rapidly in much of the world as bottlenecks are rising. Strangulation and growing demand are accompanying the grand reopening of the lockdown.
It doesn’t mean that no one gets a raise. Salaries have risen in the United States and other countries, especially in industries that rush to increase staff as customers come back.
But it does suggest that a so-called wage-price spiral – an inflation risk feared by some economists and investors, when higher wages and higher prices feed on each other – is unlikely to become. an urgent global problem so soon. This leaves room for governments and central banks to continue doing what they have been doing since the start of last year – supporting pandemic-stricken economies with more spending and lower interest rates.
“There are still a lot of jobs missing,” said Rob Subbaraman, head of global market research at Nomura Holdings Inc. “To worry about a wage-price spiral, I would need to see further acceleration wage growth in the third quarter, alongside a sharp rise in measures of inflation expectations.
Many economies have experienced an acceleration in prices in recent months. In the United States, headline consumer inflation jumped to 5% in May, the highest in more than a decade. Eurozone inflation is 2%, just above the European Central Bank’s target, but the Bundesbank has said the German rate could rise to 4% by the end of this year.
Bond markets also suggest investors expect prices to rise faster than they were before the pandemic – judging by breakeven rates or the spread between government debt yields. inflation protected and conventional type. In the United States, the expected rate for the next five years peaked around 2.8% in May and remains well above pre-pandemic levels.
“Only the United States”
Yet policymakers continue to downplay the risk of a sustained spike in inflation, arguing that any spikes in prices will subside as supply chain bottlenecks gradually ease. Federal Reserve Chairman Jerome Powell has repeatedly asserted that inflationary pressures will prove to be transitory. ECB President Christine Lagarde made a similar case last week.
As U.S. wages have grown faster than expected over the past two months, economists at Goldman Sachs Group Inc. led by Jan Hatzius predict wage growth will not fuel inflation, with the supply of workers ahead. increase dramatically over the next few months as fear of the virus subsides and an increase in unemployment benefits while the pandemic expires.
In the largest economies in Asia, the price pressures are more moderate. Japanese wages suffered an unexpected 11-month drop in March, but not at a pace that disrupts the Bank of Japan’s 2% inflation target. Consumer inflation in China is expected to remain below 2% this year, according to People’s Bank of China Governor Yi Gang, well below the government’s official target of around 3%.
“Only the United States is currently characterized by a labor shortage, growing union power and growing wage demand,” said Taimur Baig, chief economist at DBS Bank Ltd. in Singapore and former head of the International Monetary Fund. “Nowhere in Asia or Europe do we see such markers. “
“It takes years”
The divergent trajectory of the global economy towards recovery is also intended to dampen wage gains. While the Paris-based OECD has revised its global growth forecast for 2021 upwards to 5.8% from 5.6%, it has warned that the living standards of many will not return to normal levels. before the seizure for a prolonged period.
The Geneva-based ILO calculates that global labor income in 2020 was 8.3% lower than it would have been without the pandemic, and it warns that labor productivity growth will remain below two-thirds of pre-crisis levels.
All of this has left most policymakers and economists focused on supply bottlenecks as the main culprit in this year’s price spike. How long it takes to resolve these issues could determine whether they trigger a more lasting inflation spurt.
“The growing risk is that the temporary pressures will last long enough to be embedded in expectations and trigger wage pressures,” said Klaus Baader, chief global economist at Societe Generale SA. “Since it takes years to fuel a wage-price spiral, we won’t know the final answer for some time.”