Xavier Jaravel sits on the French Prime Minister’s Economic Council and has studied and researched inflation and inequality.
And he is well aware that the sharp price increases that have taken place in the past year are based on what economists call supply disruptions.
Series: The shift in the economy
After many years of absence – inflation is now back and with good news.
In a series, DN will describe why we got inflation back and what it will do to our economies. How is the shift in the economy affecting the world’s poorest countries, and what does the change mean for trade, companies and individuals in different countries.
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There are several examples of this, such as the lack of semiconductors for the car industry, or that China is closing down Shanghai, the world’s largest container port, due to the pandemic – not to mention how the war in Ukraine has driven the already high energy prices.
Such disturbances, science says, central banks can not access with conventional monetary policy.
– But the main risk now is inflation expectations. During the pandemic, large demand stimuli were made in many countries. It had the potential to create inflation, says Jaravel.
He does not mean that it was wrong of the states to come up with huge support packages – on the contrary. The pandemic created a very serious and deep crisis. Governments and central banks had no choice – they had to support economies and jobs.
– It would have been much more expensive not to do anything at all, says Jaravel.
But with the support packages also came the risk because people expect higher inflation in the future.
– If everyone thinks that there will be higher inflation, then it will be self-fulfilling. Households believe it, companies believe it and banks believe it, Jaravel explains.
– And if we go there, the main problem will no longer be supply disruptions, he adds.
By raising interest rates now and repeatedly, central banks are sending the signal that they will not accept higher inflation in the future. It is important for them to create credibility.
– If most people believe in the central banks, we will not see a spiral of expectations (which drives up wages and prices, please note) and then we will avoid it, says Jararvel.
Another question is how long-term the disturbances will be and what the consequences will be. There are signs that companies are moving production due to the disruptions, to areas and countries that are partly closer to the customers, and partly seen as somewhat safer.
An example of this is the American electronics giant Intel, which will build a plant for the manufacture of semiconductors in Germany.
But Xavier Jaravel is skeptical that this is a sign that globalization is in decline.
– It is still small investments compared to the investments made in Asia, he says about the Intel example.
– Economic actors will not change the dynamics of globalization. It will continue as before, he adds.
However, politics can change globalization, says Jaravel. In the United States, the need for “decoupling” from China is being discussed. Both President Biden and his predecessor, Donald Trump, believe that the United States needs to reduce its dependence on China – for both economic security reasons.
– In Europe, it is less strong, but there is also the idea of strategic independence here, Jaravel points out.
Strategic independence is part of the EU’s industrial policy and aims to make the Union “less dependent on others in terms of, for example, important materials and technologies, food, infrastructure and security.”
Jaravel believes that here the policy must be more goal-oriented. It is important to identify areas and then think through how the vulnerability should be reduced. For example, it takes several years to build factories for the manufacture of semiconductors.
– But the risk now is that we jump from one crisis to another. Now we have inflation and war in Ukraine, a year ago it was a pandemic, he warns.