Thursday, December 9

The dangers of inflation


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Advanced CPI data for July indicate that we are facing the highest year-on-year growth rate in prices since February 2017. Inflationary pressure in Spain, and in Europe in general, is still a long way from reaching the levels of the United States. -5.4 percent in June, the highest in thirteen years- or China, where it has been primed in industrial prices, which grow almost 9 percent year-on-year. Central banks are attentive to price developments. Among experts, the consensus is that during the second semester of 2021 we are going to experience an inflationary outbreak, the result of the start-up of the economies as the restrictions of the pandemic are withdrawn, but they hope that it will subside later. The European Central Bank has already warned that its stability objective of 2 percent per year means that it is necessary to be willing to experience increases above that figure for a long time to compensate for the very low rates that we have had. Inflation, for the moment, is moderate and allows deflation fears to be alienated and hopes that central bank interest rates, at some point in the future, will return to positive terrain, and that this will allow to stimulate the economy once again. saving and curbing indebtedness.

Although central bankers appear to be very confident about their ability to scale the process, there is no doubt that inflation will return with its consequences. The most serious, without a doubt, are the so-called ‘second round effects’, that is, the unjustified transmission of increases in the CPI to prices and wages. Even more so when the Government has opted for an emblematic decision, the revaluation of pensions according to the CPI, a resounding message so that salaries, rents and other reference prices are aligned behind them. In an economy as indexed as Spain’s, to think that these ‘second round effects’ can be mitigated is a complete illusion. The unions are the first to be in charge of making this manifest with their demands and demands.

Inflation was one of the great economic woes of the 20th century. Milton Friedman called it “the invisible tax,” because through it governments devalued legal tender money. The Germans, desperate for the debasement of their currency, threw themselves into Hitler’s arms in the 1930s. In the 1970s, Argentines received their pay twice a day and a permit at noon to go to the supermarket to spend a few bills that lost value by the minute. There are practically two generations of Spaniards who have not experienced this phenomenon. This is the result of our accession to the euro, a currency that, with its advantages and disadvantages, has fulfilled its objective of keeping prices stable. However, current monetary policy is extraordinary precisely because of the absence of inflation and the fear of deflation. If this returns to normal, the cost of financing our debt will rise, to record highs, and Spain’s inflation differential with the rest of the Eurozone will surely reappear, evidencing our lack of internal reforms.

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