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In April, Hungarian inflation in Hungary reached 2.4 percent annually, which is a dramatic slowdown compared to the first quarter data, compared to March, consumer prices fell an average of 0.6 percent. Although analyzes predicted the peak will be at the beginning of the year, on average, most people in 2020 expected higher-than-expected inflation of around 3.6%, a forecast that could go to waste along with expectations. economic at the beginning of the rest of the year.
What is interesting about the coronavirus epidemic in terms of consumer prices is that analysts say that, like normal crises, it has the opposite effects in the short and long term. There may be marked differences between countries in the development of process speed and the extent of fluctuations, but it seems certain that in the next period (up to 1-2 years) the price reduction effects will continue to dominate, but then
Even inflation can remain at exceptionally high levels for many years.
– even so high that we have not seen in the developed world for a long time since inflation fell in the 1980s.
The demand suddenly collapsed
As the epidemic continued to block the Chinese economy, it seemed that the coronavirus could remain a supply-side shock: production would stop for hours on end in many places, transportation would stop at the world’s largest industrial center, and even It could lead to product shortages. But soon after the pathogen hit its head in Europe and governments decided on strict restrictions to protect as many human lives as possible, it became clear that history did not stop there.
The supply-side problem remained (or spread to all the countries involved), but was also complemented by a much heavier demand-side one, due to the sudden hibernation of the economy, they lost many of their jobs and The era of tight belts prepared for the crisis. As a result, in the short term, coronavirus will reduce demand for most products and services (including prices):
- Fuel prices fell sharply for weeks due to the economic slowdown and the oil war between Saudi Arabia and Russia (one type of oil also fell to negative for a short time) and then corrected somewhat recently.
- the epidemic hits the service sector hard (there is no traffic in restaurants, cinemas, etc. for months), this is reflected in the prices and the players who are standing are trying to attract consumers with actions;
- rental and property prices have also started to drop in many places due to the sudden collapse of the short-term property market;
- On the other hand, this was no longer the case for food, and prices continued to rise during the coronavirus-affected period, in part due to retail outbreaks (panic purchases) and in part because of the effects of previous prices (for example, the swine fever) had not yet fully escaped.
The epidemic is a short-term general deflationary shock, even as supply has declined in several places and national currencies have weakened somewhat, cushioning this effect, Dániel Móricz, portfolio manager at Moon Fund Management, told Index.
Drag and drop and inflation
A more interesting question is what may come in the long term. Over the next 1 to 2 years, this will continue to be largely influenced by epidemiological factors, depending greatly on where, how many times, for how long the virus hits your head, and how states respond. The current reopens suggest optimism around the world, but it is not at all certain that this is justified: the trend is for the easing measures to be accompanied by a renewed acceleration of the spread.
The relaxation of the past few weeks is seen by many as hasty, but in the meantime, the frustrating economic effects also appear to be pushing public opinion toward opening up the policy. The epidemic is also likely to flare up again in waves until an effective vaccine is available.
One of the big questions for the next period will be what governments will do more,
more deaths with fewer restrictions (= less economic damage), or vice versa. If restrictions become part of our lives for a longer time, demand and with it prices may remain depressed, at least in the most affected sectors.
Airlines are already preparing to lure passengers with brutal discounts after the restart, with initial action expected in many areas. At the same time, tourism, hospitality, and any area that has been built on the overcrowding of many people in small areas may bring about the opposite process in the near future. If you limit how many people can be in a movie theater, on a plane, in a restaurant, at a concert and, ultimately, at the same time
service providers realize that they can fill less space with higher prices, which can also lead to higher prices in the sectors in question,
Dávid Németh, a senior analyst at K&H, told us. In other words, in a service sector that has been stifled for a long time, activities that have been widely available in recent years can become expensive again.
The horror we saw long ago is back
Furthermore, even in post-viral times, the main factor will be how crisis management will react to the economy. Traditional state crisis management strategies move along the axis of austerity – recovery; In the current situation, we see that most countries are investing large amounts of stimulus party money in governments and central banks in the hope that this will avoid a longer-lasting U or L crisis (such as that of 2008). This type of money creation causes inflation as defined in the textbook.
The spirit was released from the bottle, fiscal policy reached a level of relaxation. Even in a war economy, states have been given the opportunity to print money, and this could end the decades-long global disinflationary trend.
Dániel Móricz said. There are various manifestations of easing: central banks are buying assets, governments are largely guaranteeing loans, but now it is also common for states to send transfers directly to low-income people who consume the money they receive. In Hungary, the last step, which specifically stimulates inflation, has hardly taken place so far (perhaps the gradual withdrawal of the 13-month pension can only be attributed here), but in many countries, including the United States, which is setting global trends, there has been an amazing amount of fiscal relaxation.
As soon as the money pumped by the states finds its place in the economy and begins to increase demand (and with it inflation), the central bank’s usual reaction to withdraw money, an increase in interest rates, could follow. But with the current stimulus, states are also in debt (not to mention private survival loans), so
Increasing the rate will have many opponents.
And the bottom line may be that central banks will not use this monetary policy instrument, and even if inflation soars, interest rates may remain relatively low.
Due to large debts, it is conceivable that interest rates will not rise significantly even with 4-5 percent inflation, said Móricz, who said that in the future it will be less surprising if central banks finance governments directly ( currently indirectly through secondary market bonds). takes place), this is a modern monetary theory that has been entering economic consciousness for a year or two “but not yet, but de facto it is already being implemented in more and more places.”
If these predictions are fulfilled, it will also mark the end of the monetary policy regime since the collapse of inflation in the 1980s, and after many years the main torment for central banks in advanced economies will no longer be how to achieve their goals. inflation of around 2 percent. it can be replaced by a focus on unemployment.
If globalization disappears, the price will come
Consumer prices may also be affected by another aspect of the epidemic: the globalization of production will be somewhat reduced in the future by many, with a clear effect of rising prices. Not only the increase in interest rates, but also the mobility of capital and the globalization of the labor market played an important role in reducing inflation. Manufacturers have managed to keep production costs down by always looking for the cheapest resources and labor available, so much of the industrial work has migrated from the core pieces of organized labor to the south and east more cheap in the world.
In today’s economy, production and supply chains across the country meet the needs of consumers, but have been under great pressure with the coronavirus. Many believe that the experience of an epidemic can motivate even great players to tighten their chains;
risk aversion, closer production (with potentially more expensive labor) and higher inventory have a price-increasing effect.
At the same time, the analysts we interviewed agree that there is also the possibility of a change in the labor market in the other source for the next period. In recent years, the global job market has become increasingly limited and it has become increasingly difficult to find a properly trained workforce. This has created a labor shortage and, as we have seen at home, increased wages, but due to the crisis, we are postponing for a time the problem of a timed population bomb that runs through the system through an aging population. :
The reappearance of significant unemployment could offset salary growth.
The opening of the world economy also influences inflation to the extent that it is affected by the value of the national currency. In a more open economy, equalization is typical: where inflation is higher, exchange rates depreciate, reducing domestic demand and, therefore, inflation. In order to maintain international competitiveness for years to come, countries will certainly try to devalue their currencies (this is another reason why they cannot raise interest rates), whoever can. The United States is now in a more difficult position in this regard due to the nature of the dollar-based global financial system: it is difficult to weaken a currency when many are indebted to it, and as debt falls, the dollar must be repurchased.
Not that big at home right now
Although there are still many question marks, the combination of diversified effects can bring only moderate or depressed price increases (including price falls) in the short and medium term, but in the long term it can bring much more lively inflation to the world than in the last decades.
In Hungary, we started from a higher level than that of developed economies, so current deflationary forces did not send prices to the floor as much as, for example, in the euro area:
there in April there was an annual drop in prices of 0.4 percent, while here there was a 2.4 percent rise.
In its inflation report in late March, the MNB projected 3.2-3.5 percent for 2020, but the upper limit of this estimate already seems high (Matolcsys expects GDP growth of 2-3 percent in the same analysis, e even since then, which everyone except them considered too optimistic even then, and the situation has not improved in the meantime).
Consumer prices are also seriously affected by the way unemployment develops in the home (the more people who do not have a job, the less they can increase). However, Dávid Németh said
In Hungary, core inflation is unlikely to remain below 3% this year and next,
There is a good chance that the Hungarian economy will bring this value even with an unemployment rate of 6-8 percent.
(Cover and cover illustration: deer / index)
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