After a pandemic, price increases could go as high as 10% – that would change everything

These include The Good Demographic Reversal by academic Charles Goodhart and Manoy Pradhan, a former Morgan Stanley Investment Bank executive.

According to Martin Wolf, author of the Financial Times, many believe that inflation will remain below 2%. At the same level, the world’s leading central banks are pursuing this.

“But it is possible that after today’s fiscal and monetary largesse, inflation will rise in 2021, for example, to 5 or even 10 percent, as it has been in the postwar years. That would change everything,” he writes in your comment.

M. Wolf points to ch. Arguments presented in Goodhart and M. Pradhan’s monograph.

“The last time the world changed the railway in the 1980s. The change was determined by globalization and China’s entry into the world economy, but this era is coming to an end, and after that we can see the process. otherwise, ”he says.

A powerful cocktail

With the fact that inflation in a couple of years can reach 5-10%. agrees Nerijus Mačiulis, chief economist at Swedbank.

“Unprecedented increase in the money supply; expansionary fiscal policy; more sustainable economic growth, with a greater focus on the environment and pollution taxation; protectionism to replace globalization; shorten supply chains; Nationalism and immigration restrictions translate into slower productivity growth – here’s a powerful Molotov cocktail that can ignite inflation.

It will be very difficult to abandon both the increase in the money supply and the distribution of zero interest and government money: public debt has risen considerably if central banks suddenly raised interest rates or stopped lending to governments, threatened by crisis of sovereign debt. This tandem between governments and central banks is highly inflationary, but the inflationary advance will not occur in a year.

In particular, the effects of Covid-19 should be completely or nearly wiped from the air, as the price increase is severely held back by a lack of aggregate demand and high unemployment. In reality, however, many economists, who have observed extremely low inflation for a quarter of a century, dare not predict that it will now be otherwise.

I think it will be different, inflation will accelerate in a couple of years, maybe not to 10%, but to 5%. It would not surprise me at all, on the contrary, I would be surprised if inflation did not start to show its ears, “he told Delfi.

According to N. Mačiulis, the growth of the prices of the general basket of goods and services will be slow at first, but the ears of higher inflation will begin to appear on the sidelines: the growth of only some goods and services will accelerate, especially those that tax or disrupt international trade.

“For example, we are now seeing a large increase in the price of a wide range of financial assets as a result of central bank policy, which would not be expensive without the money surplus, euphoria and the formation of bubbles.” Monetary policy also makes real estate more expensive. This wave can extend to goods and services for daily consumption ”, he said.

Swedbank forecasts that inflation in Lithuania will be 1.2% in 2020 and will reach 2.3% and 3% in 2021 and 2022, respectively.

This is more than the official forecasts of the Ministry of Finance or the Bank of Lithuania, in which 1.8 and 1.2 percent are expected in 2021. inflation.

Point to the counterweight

This year, there has even been a monthly deflation in Lithuania. For example, in November, prices were 0.2 percent. lower than in October, according to the Department of Statistics.

Laura Mociūnaitė, a senior economist in the Bank of Lithuania’s Macroeconomics and Forecasts Division, said inflation in the country had declined markedly since the start of the pandemic.

“It is projected to remain low next year at 1.2 percent,” he said. – However, the factors that lead to low inflation will change. This year, inflation was reduced mainly by lower fuel prices due to the fall in oil prices. Fuel prices are expected to stabilize, so next year they will no longer reduce inflation as much as this year.

Low inflation in 2021 will be supported by slower growth in service prices. As uncertainty about future economic developments persists, wage growth is expected to slow significantly next year, easing pressure on service prices. “

Ms Mociūnaitė also explained that the current stimulus monetary and fiscal policies should not lead to a rapid rise in inflation, as they are being applied in a period of declining economic activity and are aimed at reviving and strengthening economic growth.

“The accommodative monetary policy is also in line with the target of an inflation rate close to 2% but slightly lower,” he added.

“Structural factors related to long-term trends should also not accelerate price growth. While anti-globalization processes (such as shortening supply chains) or downsizing of the workforce due to aging society may increase the cost of goods and services in the long term, these processes will be offset by continuous robotization and digitization.

Automated processes, in some cases, allow the workforce to change and allow faster and more efficient production or provision of some services remotely.

Taking into account that these factors will not cause rapid price growth and considering the future course of the pandemic and the actions taken to manage it, the inflation outlook for the next few years will not change significantly, ”said a representative of the Bank of Lithuania.