The era of rock-bottom interest rates could soon be at an end. Higher commodity prices and shipping costs are pushing up inflation, the Paris-based policy forum the OECD said. Inflation has picked up around the world due to higher costs of raw materials, constraints on the supply of goods, stronger consumer demand as economies reopen, and prices bouncing back from drops during the pandemic in some sectors, it said. A sharp rebound in consumer demand coupled with supply disruptions and depleted stores of goods have pushed up prices and shipping costs around the world.
Persistent supply shortages could lead to a longer period of higher inflation, the OECD said. The OECD expects the rate of inflation in the G20 to moderate from 4.5% at the end of 2021 to 3.5% by the end of 2022. However, the OECD said that "sizeable uncertainty remains" about this forecast. "Faster progress in vaccine deployment or a sharper rundown of household savings would enhance demand and lower unemployment but also potentially push up near-term inflationary pressures” it said in a report.
"Slow progress in vaccine rollout and the continued spread of new virus mutations would result in a weaker recovery and larger job losses."
The annual inflation rate continued to soar for the fourth month in a row in Germany, rising to 4.5% in October, with energy prices shooting up 18.6%, estimates from the German federal statistics agency Destatis showed. It is the energy price hike that has been cited by experts as the main reason behind the overall increase in consumer prices. In September, prices had risen in Germany by 4.1% year on year. "There are a number of reasons for the high inflation rates since July 2021," Destatis said in a statement, citing a temporary reduction in value-added tax (VAT) in 2020 and the introduction of CO2 pricing since January 2021. Europe's biggest economy introduced the VAT reduction to mitigate the impact of lockdowns implemented because of the coronavirus pandemic.
The ECB agreed to a new strategy earlier this year designed to avoid the risk of raising rates too soon — something it was widely considered to have done just as the Eurozone debt crisis was starting in 2011 and it hiked rates twice during a food and energy supply shock. The ECB president dismissed fears of “stagflation” and said the euro area economy was still recovering strongly, even if it had lost momentum recently due to the supply chain problems and the surge in energy prices. She said: “We foresee inflation rising further in the near term but then declining in the course of next year.” Christine Lagarde rebuffed investor expectations that the European Central Bank could raise rates next year to quell fast-rising prices, even as she acknowledged that its latest governing council meeting was dominated by a discussion of “inflation, inflation, inflation”. The ECB president said the council had done “a lot of soul-searching” to test its assumption that inflation would fade next year, and its analysis did “not support” market expectations for a rate rise before the end of 2022.
Some central banks have acted forcefully in the face of rising inflation. On Wednesday, the Bank of Canada jolted markets by saying it would stop asset purchases and raise rates sooner than expected. Brazil’s central bank also raised rates by 175 basis points, its biggest move in almost 20 years. “The danger for central banks is that inflation expectations could become unanchored,” said Randall Kroszner, a professor at the University of Chicago business school and a former Fed governor. “The ECB seems prepared to be more patient,” Lagarde said she expected PEPP to end in March, adding that the decision on whether to expand an earlier asset purchase program to offset some of the reduction would not be made until December. The €1.41tn already spent under PEPP since it was launched in response to the Covid-19 crisis last year has taken the ECB’s overall portfolio of assets to €4.5tn and allowed it to exceed a self-imposed limit to own no more than a third of any country’s eligible sovereign debt.
There are expected to be divisions on the ECB council over how much of that flexibility to preserve under the continuing asset purchase program, which is expected to be increased from its current pace of €20bn a month. When Jens Weidmann said last week that he would quit as head of Germany’s central bank at the end of the year, he warned in a letter to Bundesbank staff: “Crisis measures, with their extraordinary flexibility, are only proportionate in the emergency situation for which they were created.”
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