"Is the fear of the inflation specter justified?"

Published on: 21 October 2021

Current issues in the fields of the economy, (responsible) investment, pension and income: every week, an APG expert provides a clear answer to the question of the week. This time: Senior Strategist Frank van Weegberg on whether the increased inflation is short-term or not. "Globalization has pushed prices down for decades."

Now that the inflation rate in Europe has risen to 3% and in the United States to 5%, the key question is: is it a one to two-year 'peak' or 'shock', or will inflation last longer and thus erode purchasing power? There is a good chance that it is the former, says Van Weegberg. "Current inflation consists mainly of two effects. One is caused by production, logistics and supply issues. The other effect is due to the sharp rise in gas prices. We believe that both effects are temporary. And so the current inflation is probably also transient."

The first effect (the production, logistics and supply issues) occurred worldwide as a result of the corona pandemic. Van Weegberg: "For example, the scarcity of computer chips, the consequences of which have affected many industries. But a lot was also stuck in the Suez Canal, as a result of the blockade by container ship Ever Given in March. All this has led to increased prices for many products. But at some point, when the last aftermath of those problems has subsided and supplies have recovered, those prices will fall again."   

Shale gas

The second effect - increased oil and gas prices - is not expected to last long, according to the Senior Strategist. "The main causes are also temporary in nature: problems with gas production in Norway, a low supply of wind energy due to an unusually quiet period and the lack of approval for the Nord Stream 2 gas pipeline. Such price increases are sudden effects that also disappear, partly because, for example, the supply of shale gas increases. That is relatively laborious to produce, but with a high oil and gas price, it becomes profitable again."

And increasing Covid-19 infections in the winter period? Can they still throw a spanner in the works? "New lockdowns could put pressure on the supply of products again, which could lead to a new inflation peak. Even then, the effect on inflation is not structural. This can also be deduced from the expectations of official parties, such as central banks. For example, the European Central Bank expects inflation in the Eurozone to fall to 1.5% in 2023."  

So when will that structural, long-term inflation be lurking? Van Weegberg: "That kind of inflation is more likely to arise when we're faced with a wage price spiral. If wages rise too much, it pushes up the general price level because labor becomes more expensive. But a spiral like that only arises when high economic growth and low unemployment occur simultaneously. Unemployment in the Netherlands is low but in the Eurozone, it's still relatively high at 7.5%. That's why a wage price spiral now is unlikely."

Labor unions
In addition to the high European unemployment, there are two other reasons why we probably will not see the effect of rising wages on inflation, according to Van Weegberg. "The power of labor unions has diminished. Even in traditional industries such as the metal industry, far fewer workers are unionized these days. In newer sectors, the degree of organization is even lower. Add to that the increased number of self-employed workers and it's not surprising that the bargaining position of labor unions has deteriorated.  
In addition, the effect of rising wages on the general price level has also diminished. Globalization has meant that we've started to import more from countries with lower wages. That has pushed prices down for decades. So if our own wages rise, it will no longer lead to inflation as quickly as before." 

The 'specter' as it loomed in Germany in the 1920s is far off yet. And the inflation that is now occurring is actually quite healthy, says Van Weegberg. "We've had very low inflation for a long time, even less than 1%. Normally in Europe, we're around 1.5%. That 3% is well above that. I don't expect the ECB to raise interest rates in the next two or three years. But if persistently high inflation ultimately forces the ECB to raise interest rates, it will be better for everyone in the long run. The housing market may start to normalize again. And it's going to pay to save again. Presently, you have a loss of purchasing power on your savings. No government wants that."