Inflation: The Four Factors That Won’t Make It Go Away Soon

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Inflation has been at the top of experts’ and economists’ conversation, as they warned in 2021 that the phenomenon would not go away until this year. In fact, some say by mid-2022 inflation will not only have gone away but probably will not even peak. These are the four factors that point to rising prices staying for longer.

Inflation Setting

The rise in prices has been conquering the consumer basket and now it seems the service sector is next —a rubric in which prices are usually more stable. Although some trends and indicators show some relaxation in prices, it seems that there are other hurdles that may be more powerful.

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David Rees, senior emerging markets economist at Schroders (LON:SDR) believes that the pervasiveness of inflation will not go away anytime soon and gives several reasons to support this hypothesis.

Among these reasons, China's problems in recovering its activity after the Covid lockdowns, the growing strength of inflation in services, and the foreseeable problems in the raw materials market, all stand out.

Regarding China, the continuity of the Covid-zero policy in the country makes it likely that bottlenecks in the supply chain will persist for some time. The imposition of lockdowns hit the Chinese economy hard in April and economic output (GDP) is likely to contract in the second quarter compared to the previous one.

The Other Factors

As for interest rates, the central bank is accelerating the pace of its restrictive policies in an attempt to shorten inflation. However, these measures —rate hikes and draining of liquidity— directly impact demand but do not have the capacity to solve supply problems per se, which are causing inflation.

“Although it is true that the central bank can help moderate inflation, this time its effectiveness will presumably be less than on other occasions when demand was the main component of the price increase.”

Regarding services, when price increases reach this sector, it can be officially said that inflation is no longer transitory. Nomura economists warn that this will be the third inflation shock the world will face.

“First it was energy, now it is food, and the next will be the shock of services,” they conclude.