As the world economy grapples with the lingering pandemic and the need to support the recovery of so many important sectors, there is another area of concern emerging. After years where it largely lay dormant across most economies, inflation is making a comeback.
Inflation’s effects are beginning to be felt everywhere, but the underlying causes of this remain murky. Supply issues in the global trading system are concerning many, as pointed out in a MoneyWeek article by John Stepek, who writes of “massive traffic jams” snarling up “our system of sending ‘stuff’ around the world”.
The bigger question beyond the immediate impact on the markets and the real economy is whether the current inflationary period is just a temporary reaction to an extraordinary series of events or a more fundamental feature of the ongoing pandemic landscape.
John Stepek articulates an argument for the former: “Traffic jams clear in time. Assuming we don’t have more Covid lockdowns, and assuming we don’t have politically motivated supply shortages (this is a trickier one to gauge but it’s typically self-defeatist to cut off a source of revenue like this), then you’d expect a return to broad 'business as usual' at some point.”
But he acknowledges the growing sense that the opposite may be true and that inflation is here to stay even beyond the current supply chain squeeze. And given the difficulty of accurately gauging what exactly causes inflation – economists still cannot arrive at a definitive explanation – then taking a cautious approach can seem sensible.
Generation Z perspectives
If it is the case that inflation will be with us for the foreseeable, then what will it mean for Generation Z (born 1997–2012)? For some younger people, the spectre of inflation is being met with bafflement and indifference. As the generation that came of age around the global financial crisis and only know rock bottom interest rates, many are simply ignoring the coming inflationary period.
According to a Reuters article by Victor Jack and William Schomberg, this lack of understanding around the causes and impacts of inflation threaten to add further pressure on a generation who are already struggling with debt and lack of access to the housing market.
The writers quote Andrew McEvoy, 22, an apprentice at an Airbus wing factory in Liverpool who believes many of his peers may be sleepwalking into serious trouble.
"Maybe we're more unaware, as a generation, of the information around that and what we can do to help ourselves, which is obviously not good because there's going to be a lot of people who are getting impacted by it," he said.
The intergenerational disconnect is concerning many older observers who believe young people are ill-equipped to make good financial decisions in an age of persistent inflation.
The writers quote economist Angus Hanton: "Younger people haven't had the experience of inflation so they don't know the tricks of the trade." Hanton believes that younger people should assume that inflation will be with us for a while and adapt their approach to work and saving accordingly.
In Hanton’s view, that includes “minimising cash balances, taking the likely path of inflation into account when making wage demands and making sure pay deals can be renegotiated regularly”. By taking this approach, he argues, the next generation may be better equipped to navigate what could be a long period of inflationary pressure.
While many fear that inflationary pressure may derail global recovery, the more bullish commentators believe a controlled uptick in inflation would in fact drive growth.
Jim Paulsen of the Leuthold Group, which provides institutional research, says rising prices could boost the market and economy, according to a CNBC article by Stephanie Landsman. “We’ve been fighting inflation for four decades in [the US] — always being quick to tighten, slow to ease. And the result is we’ve created some of the most sluggish growth over the last 15 years we’ve had in the entire postwar history.”
For Paulsen, inflation “might cause businesses to expand more operations because they know they can grow into it with pricing flexibility”.
He is equally sanguine about the supply chain turmoil, which he says is caused by “companies preparing for a depressionary bust” and instead getting “a postwar boom”. He attributes the backlog to a “temporary shock caused by the Covid-19 lockdowns” and predicts that it will “moderate next year”.