Opinion

Inflation and the Omicron

photo_camera Jerome Powell, FED

The year is drawing to a close and what was thought to be only a temporary distortion with inflation rising ever higher is starting to become a matter of concern because of its impact on growth. 

Inflation has become a headache in recent months for virtually all countries, with consumption and demand surging, catching up faster than production channels and especially supply chains. 

This imbalance has turned world trade into a bottleneck and has ended up pushing up all commodities with the consequent impact on the price of products, goods and services, which is also felt in the consumer's pocket. 

There is much expectation surrounding the decisions that the respective central banks will end up taking to help reduce inflation; the role of interest rates will be relevant within a monetary policy that has remained expansive to favour consumption and economic reactivation. In 2022, the first moves to raise interest rates could take place, after long months of rates close to zero percent, at least in the case of the European Union (EU).

For Jerome Powell, the presence of Omicron would complicate things further for the United States, at a tense moment within the American Union after many difficulties for President Joe Biden to obtain the endorsement of Congress to approve his ambitious 1.2 trillion dollar infrastructure plan.

In the words of the head of the Federal Reserve, the recent increase in COVID-19 cases and the emergence of the omicron variant poses downside risks to employment and economic activity and raises inflation uncertainty.

Given the presence of Omicron, the central banker warns of a greater risk of inflation in the United States due to a delay in the re-establishment of supply chains that to date have kept various sectors unbalanced with significant effects, as is the case with the automotive industry, not only in the US, but in general, due to the lack of chips and other components because supply is slow and has ended up raising prices. 

Inflation, Powell has said, could continue to rise until a good part of next year at levels not seen in the last thirty years. 

Recently, President Biden proposed the 68-year-old Princeton University graduate to continue for another term at the head of the Fed, as he has been doing since 2018. 

"We understand that high inflation imposes significant burdens, especially on those least able to meet the higher costs of essential goods such as food, housing and transportation. We are committed to our goal of price stability. We will use our tools to support the economy and a strong labour market, as well as to prevent high inflation from taking hold," Powell warns.

Investors see in the central banker's words a signal that 2022 will see interest rates rise at least twice; for Goldman Sachs, a rise in the funds rate is expected every six months at a relatively gradual pace.

Monetary policy expertise must be brought to bear to contain inflation, it is no longer merely transitory, we will start a new year with this spectre hanging over our heads.

On the subject

And while the omicron is creeping into economic policy decisions, a number of countries are back on the road to lifting restrictions for both vaccinated and unvaccinated people, primarily in the area of travel. 

The World Health Organisation (WHO) advises people over 60 years of age not to travel, but discourages border closures or flight bans. 

Travel restrictions again put at risk a sector such as tourism that has been hard hit since the pandemic officially began. In Europe, some countries require all travellers - vaccinated or unvaccinated - to carry either a negative PCR or antigen test and in some cases impose a quarantine of several days or a 48-hour test before leaving the country they are visiting. However, making things more difficult for people's lives also causes inflation.