As the worst and most devastating initial economic impact of the global pandemic begins to wear off, nations around the world face a number of challenges in rebuilding their economies. One of them is the specter of higher inflation.
As a component of the monetary freedom score in the Index of economic freedom, higher inflation will weaken this score and have a moderating effect on economic freedom.
With the end of the lockdowns and the standardization of more and more people and businesses, the demand for commodities has increased. So have their prices. There is a lot of cheap money in many countries in search of supplies of commodities that are still relatively scarce and affected by COVID-19. Sector inflation is the result.
Reuters reports that 52 “of the 63 commodities monitored by the World Bank had an increase in price in December 2020 compared to the same month a year earlier”. Commodities such as “energy (coal and gas); agricultural products (tea, coconut oil, palm oil, fishmeal, rice, citrus fruits, sugar, logs and rubber); fertilizers; and industrial metals (copper, lead, nickel, tin and zinc).
Randy Brown, write in Forbes, reports that the post-pandemic global economy may be facing a new commodity price “super cycle” that could push prices up for many years to come. Copper, in particular, is “essential for batteries, electric cars, solar panels, wind turbines and 5G solutions.” It is also the lifeline for connecting renewable energies to the grid.
Thus, the demand for copper increases, as well as its price. Bloomberg recently cited sources predicting the metal could reach an all-time high of $ 10,000 per metric tonne in 2021.
While this is good news for Chile and other copper-producing countries, it could provide a boost to the global economy reminiscent of the oil supply shocks of the 1970s. However, the final impact on the economy will depend on how recent commodity prices ultimately impact consumer prices.
In the medium to long term, a steadily rising trend in inflation will have negative consequences for both producers and consumers. The United States and much of the world have enjoyed relatively low inflation since the early 1980s, when President Ronald Reagan and then Federal Reserve Chairman Paul Volcker implemented economically (and politically) painful measures to “break the tail” of the high inflation cycle resulting from the oil shocks of the 1970s.
This paved the way for the remarkable economic growth that resulted in the following decades. It has also contributed to greater economic freedom.
As the Economic Freedom Index notes, higher scores on the Monetary Freedom Index require stable currency and market-determined prices. Without it, long-term value creation or private capital formation is difficult.
This score is calculated using inflation data from the International Monetary Fund, adjusted by a price control penalty.
As inflation rises around the world, this index indicator score will drop. Since many governments introduce price controls in response to inflation (for example, for food and energy), these controls will further lower the monetary freedom score.
The only way for governments to avoid the stagnant economic growth rates that typically result from higher inflation (ie “stagflation”) will be to institute the harsh policies of Reagan and Volcker. If moderate to runaway inflation were to set in, governments would have to stop printing money and stop running budget deficits financed by more borrowing.
Will they do it? The healthy recovery of the global economy depends on it.
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