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All populist politicians, and so far even many economists, fix their eyes on inflation, let themselves be carried away by news about the rise in the price of this or that, about long delivery times, complicated transport or the unavailability of a specific product. Many entrepreneurs have been thinking for the past few weeks that the prices of everything, including metals, will skyrocket and never change. Consumers then like to think that the implementation of a specific policy is to blame, even if they did not object to such a policy at the time of implementation.
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It’s fascinating that so many economists are shocked at each new year-on-year inflation rate that each new number is higher than the last. This is due to the fact that until July 2021 prices rose little, so now rapidly rising prices are generating higher and higher year-on-year increases. After all, it is important to monitor the change in the pace of the price level or, more easily, the official month-on-month inflation, and it is these month-on-month data for the last three months in the Czech Republic that show almost the same values (+1.7%, +1.8%, +1.8%), i.e. inflation does not accelerate. It looks similar in Slovakia. In Germany and Poland, the pace is also decreasing month-on-month (so prices are not decreasing).
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Looking at the prices of almost all commodities on the world markets, I have the feeling that in the Czech Republic we are riding on the wave of something that is no longer going or making waves in the world. In the world or on world markets, we find only a few commodities whose price for the last month did not decrease significantly or appreciably. Likewise sea freight prices or impacts ship congestion around Shanghaie. On the morning of Wednesday 13/7, when the statisticians release their fresh numbers, there will be an hour of truth. We will see whether there will be a further decline in the rate of price growth in the Czech Republic, as indicated by developments in neighboring countries, commodity prices, consumer sentiment or the situation on the housing market.
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Central banks will no longer help
However, the situation is completely different with gas and electricity (the price of which is fundamentally influenced by gas). There, the market is extremely influenced by supplies from Russia and its aggressive policy towards Europe. As of October 2021, it is no longer a market. Both commodities continue to rise strongly in Europe as some desperation adds to Russia’s politics, with many traders preferring to buy electricity at these levels as well. Price developments are certainly not helped by various blanket subsidies or future state business in the energy sector.
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An extremely unpleasant situation will probably last for some time, when energy in Europe will be extremely expensive, quite possibly their consumption will be regulated, but at the same time the mood of consumers and producers will deteriorate. So much so that aggregate demand will slow down significantly. This would be an extremely unpleasant coincidence for Europe. But he would be excellent news for the Kremlin and their helpers or beneficiaries in Europe.
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However, nothing lasts forever and there are so-called adjustment mechanisms in the economy. That is, if prices rise so high that elastic demand (if it is elastic) itself weakens and prices return to normal. This is precisely what we observe with many metals, and thus also with many industrial products.
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This time, we cannot expect the central banks to rush to help, as they have done so many times in the last 14 years. But we can expect that, for example, rates will not rise as strongly as expected a month ago, and the markets already think so. So the economic slowdown will be faster this time. When this is a real crisis, fiscal expansion will be appropriate, for example in the construction industry. When there will be an economic crisis, not like, for example, at the beginning of the year.
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Inflation thus has a chance to become truly transitory (transitory), as everyone mocked this term from the mouths of the representatives of the FED.
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