Is inflation here to stay or only transitional? As several gauges around the world show a surge in prices the question of higher inflation for longer is back on the table. A worldwide and coordinated effort by central banks to inject liquidity and reduce interest rates as low as possible, has sparked life in the price of goods. In the last decade there were several spikes in inflation, but they never persisted.
With the pandemic raging on, central banks unleashed an unprecedented response resulting in high liquidity and record low interest rates. In addition, governments increased borrowing and spending programs. A year on now and prices are rising rapidly. Commodities like oil and lumber and other vital goods are increasing. Some argue these rises have clear pandemic related explanations and are only transitional. They are the direct result of bottle necks in supply chains and slower than usual activity.
Others argue that the fiscal and monetary stimulus will lead to a much faster economic recovery than was anticipated. Demand will overwhelm supply like is happening at the moment with microchips, wood and many metals. Another fallout of the government support is that people are less willing to work, creating labor shortages and pressuring companies to raise wages.
For now, the jury is still out. As economies reopen, we will get better clues whether the inflation is only transitional or here to stay.