Will inflation derail a global post-pandemic economic recovery?

Inflation is surging worldwide, making markets nervous that it could derail a post-pandemic economic recovery by putting pressure on central banks to consider pulling stimulus measures sooner than planned.

Central bankers say the inflationary pressure is temporary and due to the low base of comparison to a big drop in prices during the first year of the pandemic in 2020.

Oil prices have returned the pre-pandemic levels while the economic recoveries in the US and China have led to growing demand in commodities.

There have been shortages in a variety of goods.

“The rise in inflation so far has largely reflected a combination of a rebound in commodity prices and what we have termed ‘reopening’ inflation — that is to say, a rebound in prices caused by the unwinding of pandemic-era distortions,” said Neil Shearing, analyst at Capital Economics.

The consumer price index in the United States hit 5% in May, the highest rate in 13 years.

British inflation soared to its highest level since before the pandemic last month, with clothing, fuel and oil prices rebounding as the economy reopens.

Germany’s inflation also jumped in May to its highest level in a decade, mainly driven by surging energy prices.

In China, the world’s second biggest economy, the cost of goods at the factory gate rose to its highest rate in over a decade last month, though consumer prices were stable.

Emerging countries with chronic inflation such as Nigeria and Turkey have seen double-digit increases.

The effect is being felt around the world.

High inflation driven by soaring food prices has pushed seven million Nigerians into poverty, according to the World Bank.

In the United States, the price of pork is 51% higher than a year ago.

New home construction in the US has been affected by shortages of material and the high price of lumber.

The rising prices of metals have been a problem for automakers.

China announced Thursday that it was going to tap its national reserves of copper, aluminium and zinc to curb commodity prices.

Is it a temporary issue or a long-term problem?

“The risk that the initial spike in inflation would trigger second round effects leading to inflation staying high for longer seems low,” said William de Vijlder, chief economist at BNP Paribas, in a note last month.

De Vijlder said labour market slack — or unmet demand for paid labour — and competitive pressure will prevent long-term price increases.

But Susannah Streeter, analyst at financial firm Hargreaves Lansdown, said “the shortage of staff in key industries could also put a rocket under wage inflation which could linger for a lot longer”.

President Joe Biden’s huge stimulus programme has fuelled a massive recovery but bond yields have risen as markets predict that the US Federal Reserve will act to stop the economy from overheating earlier than planned.

Top Fed officials on Wednesday maintained their ultra-easy monetary policy and repeated their belief that the temporary sharp spikes in inflation were expected as businesses reopen and people return to their daily lives.

But they brought forward their timeline for a possible rise in interest rates, with a majority of central bank policymakers expecting at least two rate hikes by the end of 2023, a year sooner than in their previous outlook.

Yields rose in Europe, too, putting pressure on the European Central Bank.

Analysts say a tightening of central bank policy could derail the post-COVID recovery.

“That would result in higher rates of interest on home loans and credit cards and there are concerns it could dampen consumer demand too quickly and set back the overall economic recovery,” Streeter said.

“Companies which need to borrow money to expand may be put off from that course of action if interest rates increase too rapidly, which could drag on economic growth.”

ECB chief Christine Lagarde said just last week that it was “too early” to consider winding down pandemic support.

But central banks in Iceland, Brazil and Russia have already raised their rates to counter inflation.