However, it is possible that some sectors face some permanent loss in activity even once all restrictions are lifted. It is too early to gauge the long-term impact of the crisis on consumer behaviour, but appetite for travel, for instance, may be affected. Similarly, it is possible that the pandemic has accelerated for good the transition to digital.
Unfortunately, this displacement of global spending to goods, which more than services often entail tortuous internationalised value chains, has been a powerful factor behind the spectacular rebound in inflation, reaching in many places levels unseen in decades. Bottlenecks would have appeared anyway, since the reopening was largely synchronised across all major economic regions and would have been difficult to absorb by supply capacities, but the strength in demand pushed them to an extreme.
To give a concrete example, the explosion in worldwide spending on TVs, laptops and electronic games had already overwhelmed the global microchip industry when the car industry restarted.
The role of demand in 2021 is precisely the reason why we think the current inflation spike is transitory, however, risks are not evenly distributed across regions.
Interest rates
In emerging markets, less credible central banks have been forced to start tightening fast in 2021 in reaction to the inflation spike, and will probably continue into 2022, dampening domestic demand. Not all countries may be ready to swallow that potion, but the example of Turkey – which is cutting rates – and its currency free fall suggests that there is no costless escape.
The situation in the developed markets is quite different. The recovery in the US – on fiscal steroids – has been so strong that 'second round' inflation effects have started to appear, with, in particular, a massive acceleration in wages. The Federal Reserve has been shifting its message in recent weeks, from a readiness to tolerate “inflation overshooting” for a while to accelerating the termination of its bond buying programme to give itself space to hike rates in 2022. Yet, movements on the yield curve and inflation-indexed bonds suggest that investors trust the capacity of the Fed to nip the inflation spike in the bud with only a limited number of hikes.
This explains why long-term interest rates remain low, which should cushion the economy against most of the central bank tightening. The ECB is much further away from hiking, given the absence of wage acceleration in the Euro area. The Bank of England will probably emulate the Fed: labour shortage is prevalent in the UK, probably for more structural reasons than in the US, and the country has a history of higher inflation than in the US or the Euro area, which would call for pre-emptive action.
