Millions of Missing Jobs Should Make Inflation Hawks Think Twice

One reason so many policymakers refuse to panic over inflation is that the world economy still lacks millions of jobs. The global job loss from the pandemic is estimated at 75 million by the International Labor Organization. this year. Nor does it expect to close the gap in 2022, when it believes the world will still be short of 23 million jobs from its pre-Covid path, even as economies rebound.

The Organization for Economic Co-operation and Development echoed the warning, saying that unemployment in many countries will remain above pre-crisis levels next year. With so many workers still, it must be hard to push for big wage increases for those in employment — even though the cost of living is rising sharply in much of the world because of supply constraints and rising demand from lockdowns. With reopening.

no spiral

This does not mean that no one gets a salary. Wages are rising in the US and other countries, especially in industries that are rushing to staff again when customers return.

But it does suggest that a so-called wage-price spiral – an inflationary risk feared by some economists and investors when higher wages and higher prices fuel each other – is likely to become an urgent global problem any time soon. is unlikely. This leaves room for governments and central banks to do what they have been doing since early last year – support pandemic-stricken economies with higher spending and lower interest rates.

“There are still a lot of jobs missing,” said Rob Subbaraman, head of global market research at Nomura Holdings Inc. “To be concerned about a pay-price spiral, I would need to see a further acceleration in wage growth in the third quarter, with a sharp increase in inflation expectations measures.”

What do Businesshala economists say？

Inflation expectations have risen in recent months. Constantly climbing high will be a cause for concern. So far, however, the rise from previous gloomy levels has been more welcome than a warning.

–Andrew Husby and Yelena Shulyateva

Many economies have seen price increases in recent months. In the US, headline consumer inflation rose to 5% in May, the highest in more than a decade. Euro-regional inflation is operating at 2%, just above the European Central Banks target, but the Bundesbank says the German rate could rise to 4% by the end of the year.

Bond markets also suggest that investors expect prices to rise more rapidly than before the pandemic – given breakeven rates, or the difference between yields on inflation-protected government debt and the traditional kind. In the US, the expected rate for the next five years peaked at around 2.8% in May, and remains well above pre-pandemic levels.

‘America Only’

Yet policymakers continued to play down the risk of a sustained inflation outbreak, arguing that any price increases would be mitigated if supply-chain disruptions gradually ease. Federal Reserve Chairman Jerome Powell has repeatedly argued that inflationary pressures will prove to be transient. ECB president Christine Lagarde made a similar case last week.

While US wages have risen faster than expected over the past two months, economists at Goldman Sachs Group Inc., led by Jan Hetzius, have predicted that wage increases will not fuel inflation, as virus fears dent workers in the coming months. supply will increase dramatically. A pandemic-era boost for unemployment and unemployment benefits is coming to an end.

In Asia‘s largest economies, price pressures are less frequent. Japanese wages fell an unexpected 11-month low in March, though not at a troubling pace to the Bank of Japan’s 2% inflation target. China‘s consumer inflation is expected to be below 2% this year, comfortably below the government’s official target of around 3%, according to Yi Gang, governor of the Peoples Bank of China.

“Currently only the US has labor shortages, growing union power and rising wage demand,” said Taimur Baig, chief economist at DBS Bank Ltd in Singapore and a former International Monetary Fund official. “Nowhere in Asia or Europe do we see such markers.”

‘It takes years’

Also set to put the brakes on wage benefits is the path to recovery of the world economy. While the Paris-based OECD has revised its 2021 global growth forecast to 5.8% from 5.6%, it has warned that living standards for many will not return to pre-crisis levels for an extended period.

The Geneva-based ILO calculates that global labor income in 2020 was 8.3% lower than without the pandemic, and warns that labor productivity growth will remain at less than two-thirds of pre-crisis levels.

All this has led most policy makers and economists to focus on supply constraints, which are the main culprits for the rise in prices this year. How long those issues take to resolve can determine whether they trigger a more permanent bout of inflation.

“The growing risk is that temporary pressures last long enough to become embedded in expectations and trigger wage pressures,” said Claus Baader, global chief economist at Société Générale SA. “Since it takes years for the wage-price spiral to kick in, we wont know the final answer for some time.”