Dive brief:

  • A recent surge in inflation likely heralds an upward trend in prices over several decades, fueled by a decline in globalization, aging populations in China and developed countries, and the costs of servicing inflated public debt. and adaptation to climate change, economists said in a statement. American Enterprise Institute Webinar.
  • The consumer price index rose 5% in May from the previous year, the biggest inflation gain since August 2008, the The Ministry of Labor said today, after an increase of 4.2% for the year ended in April.

  • Rising prices for used cars and trucks accounted for much of the increase in inflation in May, but a wide range of other commodities also pushed the index up, including household furniture, new vehicles, air fares and clothing, the Labor Department said.

Dive overview:

Financial directors, as part of scenario planning, may consider several ways to stamp against a sustained rise in prices, according to economists and financial executives.

These measures include building up inventories at current prices, issuing debt at unusually low interest rates and hedging against the depreciation of the dollar, they said. CFOs would also do well to consider moving some of their corporate investment portfolios to gold, Treasury Inflation-Protected Securities (TIPS) and other hedge against rising prices. price.

Inflation has risen amid slowing economic growth and record fiscal and monetary stimulus, including the Federal Reserve’s pledge to continue indefinitely with monthly purchases of $ 120 billion in Treasury bonds and mortgages . With widespread immunization and after months of in-home austerity, consumers are ready to spend again.

“On top of fiscal policy, on top of monetary easing, you have this pent-up demand that you now expect to be released as we get back to normal,” Desmond Lachman, AEI member and former deputy director of the International Monetary Fund, said. “I just don’t see how you’re not going to have inflation.”

Rather than fight inflation, Fed policymakers plan to let it surpass their target of 2% to make up for past deficits and reduce unemployment, now to 5.8%.

“We have the strongest economic growth in the United States for over 40 years, under the loosest financial conditions in world history with the loosest mix of monetary and fiscal policy,” Kevin Warsh, member of the Hoover Institution and former Fed governor, told the AEI panel on June 8.

The Fed and the Biden administration say the big price jump is transient and a consequence of the strong recovery from the pandemic.

Inflation will eventually slow as the surge in demand fades and supply bottlenecks ease, they say. Price increases could be particularly high in the coming months due to “base effects” or comparisons to low inflation at the height of the pandemic last year.

Yet some economists see high inflation persist for up to 30 years, noting a reversal in demographic trends and other drastic trends that have increased labor availability and held back price increases for decades.

Populations are aging and labor force growth is slowing in China and most advanced economies, putting upward pressure on wages and government spending, according to Charles Goodhart, former member of the Monetary Policy Committee of China. the Bank of England.

Meanwhile, globalization recedes as countries erect barriers to migration and the exchange of goods, services and capital.

“These underlying trends in globalization and demographics are changing,” said Goodhart, co-author of “The great demographic turnaround: aging societies, reduction in inequalities and resumption of inflation. “” We believe that over the next three decades, rather than being disinflationary, they will be inflationary. “

In addition, “the effect of tackling climate change is likely to lead to very significant additional spending and even more inflationary forces,” Goodhart told the AEI panel.

Whether optimistic or pessimistic about inflation, a central banker has a cloudy view of the future of prices at best, Warsh said.

“Do we or the Federal Reserve or the economics profession generally have a robust model for predicting inflation?” He asked the panel. “I would suggest that the answer to this question be ‘No’. “

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