Millions of Missing Jobs Should Make Inflation Hawks Think Twice
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.
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.”
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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.
‘Only the U.S.’
Yet policy makers continue to play down the risk of a sustained inflation outbreak, arguing that any price spike will unwind as supply-chain blockages gradually ease. Federal Reserve Chair Jerome Powell has repeatedly argued that inflation pressures will prove transitory. ECB President Christine Lagarde made a similar case last week.
While U.S. wages rose faster than expected in the last two months, Goldman Sachs Group Inc. economists led by Jan Hatzius predict pay growth won’t stoke inflation, with the supply of workers set to increase dramatically over the coming months as fear of the virus wanes and a pandemic-era boost to unemployment benefits expires.
In Asia’s biggest economies, price pressures are more subdued. Japanese wages unexpectedly snapped an 11-month decline in March, though not at a pace to trouble the Bank of Japan’s 2% inflation target. China’s consumer inflation is expected to stay under 2% this year, according to People’s Bank of China Governor Yi Gang, comfortably below the government’s official target of about 3%.
“Only the U.S. is presently characterized by labor shortage, rising 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 keep the brakes on wage gains is the world economy’s diverging path to recovery. While the Paris-based OECD has revised up its 2021 global growth forecast to 5.8% from 5.6%, it warned that living standards for many won’t 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 it would have been without the pandemic, and it warns that growth in the productivity of labor will remain at less than two thirds of pre-crisis levels.
All of this has left most policy makers and economists focused on supply bottlenecks as the chief culprit for this year’s surge in prices. How long it takes to resolve those issues could determine whether they trigger a more lasting bout of inflation.
“The growing risk is that temporary pressures last long enough to be embedded in expectations and trigger wage pressures,” said Klaus Baader, global chief economist at Societe Generale SA. “Since it takes years to stoke a wage-price spiral, we won’t know the final answer for some time.”
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