Is all inflation short-lived for a long enough period of time?

On Wednesday, the world learned that the US consumer price index had risen to 6.2% in October, the fastest annual growth rate since 1990.

Inflationists like Steve Hank I am outraged that US inflation is not a temporary supply chain issue. He declared: “Changes in consumer spending have led to a general increase in prices in various spending categories” because “the incompetent Fed has created a lot of excess funds.”

You would think that this news constitutes a rather detrimental blow to “Team Transitory”—those who believe that the impact of inflation is the short-term consequence of pandemic-related supply shocks—they are increasingly fighting inflationists on Twitter.

but not. The team has not given up the ghost yet.

More importantly, on Thursday, they passed the Bank for International Settlements Latest Announcement, Come in with something strategic Air hood Revive their case.

This is the so-called “bullwhip effect.”

As the authors Daniel Rees and Phurichai Rungcharoenkitkul explained, bottlenecks in the supply of commodities, intermediate products, and freight lead to price fluctuations and extended delivery periods. However, in order to alleviate these problems, supply chain participants inadvertently started to build buffers (in an already streamlined network), further exacerbating the problem.

From the announcement (our focus):

The anticipation of product shortages and preventive hoarding at different stages of the supply chain exacerbated the initial shortage (“bullwhip effect”), thereby further encouraging the establishment of buffers. These changes in behavior may lead to feedback effects that exacerbate the bottleneck. In this regard, there are similarities between supply chain disruptions and liquidity pressures in financial markets.

The third important background factor is the lean structure of the supply chain. In recent decades, the supply chain has placed efficiency above flexibility. These intricate production and logistics networks are a virtue in normal times, but they become a kind of shock spreader during the pandemic.Once there is a misalignment, the complexity of the supply chain makes it difficult to repair, resulting in a continuous mismatch between supply and demand.

What the Bank for International Settlements seems to be saying is that temporary inflation is no different from temporary liquidity shortages in financial markets. In the absence of cool-headed countercyclical entities like lenders of last resort, financial markets will always snowball into the market. The feedback loop effect leads to a complete financial collapse.

This is an argument FT Alphaville Also made it very early During the epidemic.

For ordinary hard currency fetishists, it sounds like BIS admits that the economy is at risk of falling into a self-reinforcing feedback loop, which will spiral into hyperinflation and overdrive.

But no, BIS says this:

… Over time, persistent bottlenecks may also prompt corrective changes in behavior, for example, by providing incentives for investments to expand capacity. Once the bottleneck begins to ease, the feedback loop can serve as a virtuous circle to reduce the bullwhip effect. In this way, just as bottlenecks last longer than originally anticipated, their resolution may also be faster than currently feared.

So this is only necessary market rebalancing. If we survive the storm, we will eventually reach an idyllic rebalancing point characterized by abundant goods and harmonious supply. The market mechanism will save us. There is no better way to treat high prices than high prices.

So they said:

… Once relative prices are fully adjusted to adjust supply and demand, these effects will be alleviated. As bottlenecks and preventive hoarding are weakened, some price trends may even reverse. In the second stage, the mechanical effect on CPI is likely to lead to deflation.

Although they did warn, it depends on conditions that do not trigger an upward shift in wage growth or inflation expectations.

If inflation expectations are not curbed, the possibility of a spiral increase in wage prices will be higher. In recent months, market-based and survey-based inflation expectations have increased, while bottlenecks have also tightened, albeit from a very low level in 2020. The inflation rate from short-term inflation expectations to long-term inflation expectations has increased (see Boissay et al. (2021)).

BIS did not comment on the extent to which the vaccine injunction could exacerbate labor shortages. It also fails to address the obvious problem that monetary authorities have no incentive to discuss their concerns about inflation, because addressing the elephant in the room may only make things worse.

If anything is unclear, Hyun Song Shin of BIS — he pointed out in the July market Pricing is temporary -Already explained all this with more understandable tweets on Twitter.You can read his topic here.

We think it is useful at this point to compare and contrast the relative timelines of Team Transitory and Team Inflation used as a basis for comparison. Otherwise, on a sufficiently long timeline, isn’t every period of inflation in history short?

Go to figure it out.

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