A sustained rebound in inflation has the potential to up-end asset markets
Not long ago economists tended to the view that the covid-19 pandemic would lead to a prolonged slump in the rich world. That view has not worn well. In February America’s Congressional Budget Office predicted that growth in America in 2021 would be 3.7%. On July 1st it doubled that forecast to 7.4%. Since May the Bank of England has revised up its estimate of BritishWith unexpected growth has come an unexpected spurt of inflation. A certain amount was baked in.
A sustained rebound in inflation would be bad news for two reasons. First, inflation hurts. Life-satisfaction surveys carried out in the 1970s and 1980s found a one-percentage-point rise in inflation reduced average happiness about as much as a 0.6-percentage-point rise in the unemployment rate.
For how long will engorged demand come up against constrained supply? The experience of 2020 showed that supply chains could find a way around some issues—such as shortages of toilet roll and diagnostic tests—relatively quickly. The trouble is that microchip supply and shipping capacity are relatively slow to adjust: expanding capacity requires investment in fabs and ships. Firms report that they expect delivery times to be longer, not shorter, in six months’ time.
Despite growing by nearly 350,000 jobs in June, America’s leisure and hospitality is still only seven-eighths as big as it was before the pandemic in employment terms. Workers for whom $2,000 in stimulus payments earlier this year and extended unemployment insurance made a big difference find themselves in a seller’s market. Wages in leisure and hospitality jobs are nearly 8% higher than in February last year; job openings are abundant.
Some speculate on causes with which it is harder for economists to get to grips. The psychological caesura of the pandemic may have given people the time to wonder what sort of work they want to return to, provoking soul searching and curious forays into new territory. Presumably at some point such job-changers will return to work, if perhaps in other sectors. But when that might be is not clear.
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