One reason why so many policy makers are refusing to panic about inflation is that the world economy is still short so many millions of jobs.
The global employment shortfall from the pandemic is predicted by the International Labour Organization to be 75 million this year. Nor does it expect the gap to be closed in 2022, when it reckons the world will still be 23 million jobs short of its pre-Covid path even as economies rebound.
The Organisation for Economic Cooperation and Development echoes the warning, saying unemployment will remain above pre-crisis levels in many countries next year.
With so many workers still on the sidelines, it should be harder for those in employment to push for big pay increases—even though the cost of living is rising fast in much of the world as supply bottlenecks and surging demand accompany the great reopening from lockdown.
No Spiral
That doesn’t mean nobody gets a raise. Wages have been climbing in the U.S. and other countries, especially in industries that are rushing to staff up again as customers return.
But it does suggest that a so-called wage-price spiral—an inflation risk dreaded by some economists and investors, when higher pay and higher prices fuel each other—is unlikely to become an urgent global problem anytime soon. That leaves room for governments and central banks to keep doing what they’ve been doing since early last year—support pandemic-stricken economies with more spending and low interest rates.
“There still lots of jobs missing,” said Rob Subbaraman, head of global markets research at Nomura Holdings Inc. “To become worried about a wage-price spiral, I would need to see a further pickup in wage growth in the third quarter, alongside a sharp rise in measures of inflation expectations.”
Price Pressures
Many economies have seen an acceleration in prices over recent months. In the U.S., headline consumer inflation jumped to 5% in May, the highest in more than a decade. Euro-area inflation is running at 2%, just above the European Central Bank’s goal, but the Bundesbank says the German rate could rise to 4% toward the end of this year.
Bond markets also suggest investors expect prices to rise more rapidly than they were before the pandemic—judging by breakeven rates, or the gap between yields on inflation-protected government debt and the conventional kind. In the U.S., the expected rate for the next five years hit a peak around 2.8% in May, and remains well above pre-pandemic levels.