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Inflation occurs when very high demand meets low supply. This could happen after the pandemic, if the billions in aid packages kick in and people diligently use again. Economics professor Sarah M. Lein from the University of Basel explains and relativizes.
SRF News: Do you share the fear of inflation?
Sarah M. Lein: Some commentators fear that inflation may temporarily rise. The US economy in particular is likely to open up faster because the vaccination campaign is progressing faster than expected. Many will catch up on consumption, going on vacation about three times instead of just once. This can cause service bottlenecks and price increases.
What role do government aid packages play?
There are two effects that will lead to a notable increase in demand and slightly higher prices next year: On the one hand, the segment of the population with higher incomes saved a lot during the crisis. On the other hand, part of the large aid packages could be used for consumption.
Will wages go up too?
Wages are often tied to expected inflation rather than just compensation for past inflation. Therefore, it is conceivable that wages will go up a little more in a year. However, inflation expectations in the coming years are likely to be relatively low.
When and why will the price increases end?
A temporary increase in demand also has a temporary effect on prices. The growth rate goes up once, and even if this price level remains higher but constant, the inflation rate returns again. The inflation rate in the medium term is largely determined by expectations. Here the central banks regulate inflation in the medium term with their target figures. He has done a very good job over the last few decades.
Central banks flooded the markets with money without raising the inflation rate. Can central banks continue to control prices?
In fact, for the past decade, inflation rates have been near the lower end of what central banks want. The US central bank changed its strategy and targeted an average inflation rate of two percent over several years instead of a future inflation rate of two percent. So once inflation was too low, it was allowed to rise again to reach the cutoff.
Could it be that there will be five percent inflation in the next few years and that the US Federal Reserve will tolerate it?
Yes, but that would also be done to return to an average of two percent. If the cut became too high over several years, the central bank could, for example, raise interest rates or withdraw quantitative easing programs. Switzerland, in particular, did very well with very low inflation rates. Therefore, it would be credible for the SNB to oppose high inflation rates.
Wouldn’t higher interest rates stifle the economy?
It depends on the level of inflation rates. If they weren’t exactly ten percent or more, you wouldn’t have to raise interest rates too high. At the moment we are still in negative interest rates. Certain areas would probably not be unfortunate if some normalization were to take place.
The interview was conducted by Simone Hulliger.
