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Price increases and socioeconomic repercussions

inflation cyprus mail

By Andreas Charalambous and Omiros Pissarides

Following the prolonged period of subdued inflation, discussions are currently focusing on the evolution of prices, given their serious effects on citizens’ everyday lives and on macroeconomic policy.

The upward trend is widespread. Inflationary pressures primarily concern susceptible products, including energy, transport and certain raw materials, and have considerably exceeded the central banks’ targets. Moreover, the inflation expectations, a reliable indicator of long-term trends, are also on an upward trend.

Across most occupations, wage increases remain moderate, reinforcing the arguments of those analysts who believe that the current inflation pressures are, in essence, temporary. Viewed from another angle, the observed increase in consumption, supply-side bottlenecks in the production of certain raw materials and impediments in the transport sector, as well as “loose” monetary conditions reinforce the arguments of sceptics. The latter believe that price increases reflect permanent trends and are likely to lead to stagflation and severely impact living standards.

Already the central banks of the USA and the UK, taking into account the recently rising inflation, are pointing towards a gradual decrease in liquidity provision via reduced asset purchases and a possible increase of interest rates in the course of 2022. In contrast, the ECB remains cautious, announcing for the time being the continuation of an accommodative monetary policy stance. Such an approach is, indirectly, supportive of economic activity and facilitates the servicing of public debt, which is particularly important for the highly indebted southern European countries.

In general, what seems to prevail is a ‘’wait and see’’ attitude until more evidence is gathered on the current situation and outlook. This reflects the fact that the traditional view, whereby a close relationship between liquidity and inflation exists, which was of decisive importance for central banks’ policy approach, is currently disputed. The majority of analysts express the view that inflation is not primarily linked to liquidity, but it is related to structural factors of permanent nature, such as population ageing and technology. Such factors, according to the specific argument, tend to lead to lower inflation, thus expanding the scope for fiscal and monetary authorities to stimulate the economy.

The evolution of energy prices deserves special mention. On the one hand, the observed upward trend leads to desirable savings in energy consumption and favours the shift towards renewable energy. However, in parallel, it negatively impacts the vulnerable segments of the population. Hence, the adoption of counteracting measures in favour of low-income citizens is considered essential.

In conclusion, recent developments confirm that the inflation outlook is surrounded by uncertainties. Within such an environment, a flexible policy stance is warranted. As far as the EU is concerned, the adoption of restrictive monetary measures is not recommended, since they would risk the recovery of economic activity, which at present remains rather weak.

 

Andreas Charalambous is an economist and a former director at the finance ministry. Omiros Pissarides is the managing director of PricewaterhouseCoopers Investment Services.

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