July 2021

Accuracy Talks Straight #2 – Economic point of view

Inflationary risk: where should we be looking?

Hervé Goulletquer
Senior Economic Advisor, Accuracy

Let’s remember the time before the pandemic. Prices are reasonable. From the beginning of 2010 to the beginning of 2020, the average annual increase in consumer price indices, when we exclude particularly volatile items like energy and food products, reaches 1.8% in the United States and 1.1% in the eurozone. The 2% objective set by central banks is not met and even the very low rate of unemployment (at the beginning of last year, it was 3.5% in the US and 5% in Germany) seems unable to generate an acceleration, via more dynamic labour costs.

Labour market developments – deregulation and a decrease in the bargaining power of employees – may explain the majority of this result. A collective preference for saving over investment and the credibility of monetary policies are other explanations that can be put forward.

But it’s only after a COVID-19 crisis that has lasted almost a year and a half and a way out that is finally taking shape, at least in the US and Europe, that the price landscape seems to have been thrown upside down! In two months (April and May), this very same core of prices increases by 1.6% in the United States (a 10% annual rate!) and 0.7% in the eurozone (an annual rate of over 4%). Just what is going on? This price acceleration comes as somewhat of a (bad) surprise, particularly because the objective of economic policy, throughout the pandemic, has been to maintain productive capacities (companies and employees), so that activity can restart ‘like before’ when the public health conditions allow it.

So, in terms of prices, things may not be happening exactly as expected. What explanations can we give? Let’s start with three.

First, the reopening of an economy more or less “preserved” over a fairly long period requires rebalancing. Starting production again is not instantaneous, and demand during lockdown is not the same as demand during unlockdown. For supply, a raw materials index, like the S&P GSCI, increases by 65% over one year (and even 130% compared with the low point in April 2020). Similarly, the cost of sea freight increases over one year by more than 150%. As for demand, during this interim period between one economic state and another, two mechanisms of upward price distortion coexist. The goods or services that turned out to be the winners of the lockdown have still not relinquished their crowns; their prices remain dynamic. Those that were the losers can now “pick themselves back up”, or rather pick their prices back up! The two graphs below illustrate what is happening in the US.

Based on this two fold observation and at this stage of analysis, an initial conclusion emerges: the price acceleration phenomenon may very well prove temporary, as the central bankers keep telling us. The production circuit will get back up to “cruising speed”, and the concomitance of these two movements in the rise of certain retail prices is not expected to last.

US: price winners from unlockdown (4% of index)

US: price winners from lockdown (12% of index)

We must remember the mechanisms that are at the heart of forming consumer prices. There are three key points in the matter.

1. Transmission losses between the raw product prices and consumer prices are very significant, so much so that in the American case the correlation between the two series is only 10%.

2. The profile of labour costs, and especially those per unit of output (the former from which the evolution of labour productivity is subtracted), shapes, with a delay of a few quarters, the profile of consumer prices. The messages sent by the front end of this relationship are not worrying. Unemployment is still far from its pre-COVID-19 level and businesses are putting a lot of emphasis on the need to improve their efficiency.

3. Inflation expectations play a significant role in the formation of prices. Indeed, the stability of expectations is the guarantor of the stability of prices. The reasoning behind this is as follows: if all consumers start to believe that prices will accelerate, they will together precipitate purchasing decisions. The imbalance, which is most often inevitable, between a sudden increase in demand and an offer that struggles to adapt quickly leads to the phenomenon of price acceleration. This phenomenon will escalate and become permanent if labour costs follow prices. It would then be justified to talk about inflation. Let’s say that, for the time being at least, expectations have done quite well in resisting the “fuss” generated by these somewhat sharp increases in consumer prices.

China: transmission losses between production price index (PPI) and core consumer price index (CPI)

US: key role of unit labour costs in the formation of retail prices

To conclude on this second analytical point, the risk of “cyclical” inflation seems rather limited at the moment.

Finally, despite the explicit wish and will to return to normal once the pandemic is behind us, shouldn’t we question the changes that it has brought about? Let’s ask three questions:

1. How can we eliminate the divergences generated by the health crisis (countries, sectors, companies and households, employment and savings)?

2. What will be the effect of the rise in debt (public and private)?

3. How can we normalise an economic policy that is so highly accommodating?

It is precisely because these questions exist that the resolve behind current economic policy is both remaining and transforming. The best illustration of the approach can be found in the United States in the High Pressure Economy. Its ambition is threefold: to prevent a decline in potential growth, to reorientate the economy towards the future (digital, environment and education/training) and to galvanise both supply and demand. This requires an increase in public demand and an increase in transfers, with the idea that private spending will follow. At the same time, it is also necessary to ensure that sectoral and structural policies contribute to the corresponding supply side changes, higher productivity gains and more jobs, all while avoiding excessive timing differences between the respective upward shifts in demand and supply. Otherwise, there would be a risk of creating less reasonable price conditions. Further, there is no point trying to hide it: there is an element of “creative destruction”’ in the approach taken.


1. The questioning of the triptych – movements (goods and people) / concentration (locations of production and possibly companies) / hyperconsumption – because of the constraints of sustainable development

2. The rebuilding of productive supply (air transport, tourism, automotive, etc.)

3. The matching of labour supply and demand with both labour shortages and excesses.

We have to admit that we are not facing a classic, cyclical sequence. Adjusting economic policy may not be appropriate (stimulus either poorly calibrated or ill-suited), and structural and sectoral changes may generate imbalances at the macroeconomic level; price acceleration would be an indicator of this. Of course, so far, this is all conjecture, but we have a duty to remain vigilant.


The temporary is not made to last ; the cyclical sequences are not sending any particularly worrying messages in terms of prices today or in the near future; the mix, formed through economic policy initiatives and structural changes currently being set in motion, should be closely monitored because it could be a source of imbalances, including greater inflation. A certain historical reference may be worth considering: the years following the end of World War II. Indeed, this period had a need both to support the economy and to reabsorb the imbalance between an awakening civilian demand and a then very military supply. All of this forced structural and sectoral developments. But beware: even if there is a certain resonance in terms of the sequences, the issue of time is perceived differently. It was necessary to move very quickly 75 years ago, but many believe, rightly or wrongly, that time pressure is less intense today. As such, neither policy initiatives nor structural changes would be of such a magnitude and speed to generate serious imbalances, including the likes of more inflation.

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