MILAN: High inflationary pressures in the post-pandemic economy are partly driven by secular trends and forces, many of which are on the supply side.

While there are also temporary factors, such as supply-chain disruptions, traffic jams and China's "Covid-zero" policy, these should eventually disappear. However, secular trends in many economies and financial markets around the world are leading to a new equilibrium.

We are emerging from a prolonged period of deflationary conditions in manufactured goods and intermediate products (a significant portion of the tradable portion of the global economy), exacerbated by the introduction of vast amounts of previously unused, low-cost productive capacity. emerging economies.

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The equilibrium market response to an increase in demand will always involve some combination of supply expansion and price rise, but for the past several decades supply expansion has clearly prevailed, making deflationary pressures routine.

However, as tens of millions more consumers enter the middle class, the amount of unused productive capacity in the global economy is shrinking and global demand has increased.

The elasticity of global supply chains has decreased, giving workers in advanced economies more negotiating power. Proof of this is not difficult to find. Employers are finding it challenging to ignore potential and current employee preferences for hybrid work as union organizing continues to grow and become more successful.

The issue of demographic aging is as follows. In the cluster of nations that account for more than 75% of global GDP, populations are ageing, some very rapidly.

Despite longevity gains, this trend suggests a shrinking labor pool and rising dependency rates, with no corresponding increase in demand. These and other factors are exerting upward pressure on wages and prices.

Health and education, two sectors that generate a significant amount of employment in the non-tradable sector of any economy, were among the industries that suffered severely from extreme safety and stress issues during the pandemic.

In terms of employment, the healthcare industry in the United States is second only to the government with 20 million and 14 million jobs, respectively. However, after the pandemic, poor working conditions and low wages continued, leading to a shortage of workers.

Although a new market equilibrium has not yet been reached, when it does, it will undoubtedly involve higher wages for people employed in these industries, leading to higher real (inflation-adjusted) costs.

More generally, a new era of frequent, severe shocks to the global economy by factors such as pandemics, wars, supply-chain disruptions, geopolitical tensions and others has begun.

Supply-chain diversification is a process that is currently underway, and new economic policies are strongly supporting this trend. Gone are the days when these chains were built solely on the basis of cost, immediate efficiency and comparative advantage. While more flexible, new, diverse supply chains will also be more expensive.

Geopolitical tensions play an important role in this process. Governments now increasingly engage in "buddy-shoring" through the use of laws (such as tariffs, subsidies, or outright sanctions) aimed at reshaping their countries' trade patterns in favor of strategic allies and other, more trustworthy partners. are promoting. Will have to make

One reason for this is a response to the potential effects of the increased use of trade and finance to influence international relations or conflicts.

While the security benefits of these policies are up for debate, it is clear that they will fuel inflation as they move supply chains away from what are clearly the most economical sources.

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In fact, onshoring, the cost of which is so high that policies encouraging it can be justified only in areas exhibiting extreme economic and national-security vulnerabilities, is an even more extreme version of friend-shoring.

For example, in response to Russia's involvement in the conflict in Ukraine, Europe has adopted a relatively rapid energy system diversification strategy to reduce dependence on Russian fossil fuels.

This process will increase long-term energy costs, at least until renewable energy technologies are fully adopted in a few decades, and will have significant additional inflationary pressures in the years to come.

A sharp rise in the prices of dollar-denominated goods, including food and fossil fuels, has accelerated inflation in many countries when the dollar strengthens.

And in low-income developing countries, where food and energy account for a large proportion of household spending and aggregate demand, the impact is particularly impressive. Many of these countries are already dealing with crises related to affordability as well as food and energy shortages.

A growing body of evidence suggests thatindustries in the United States are becoming more concentrated both overall and in comparison to Europe. 

There is some debate over the root causes of this trend; Thomas Philippon of New York University attributes a large portion of the blame to the failures of competition policy; however, there is little question that inflation exacerbates the issue of market concentration.

According to economic theory, productivity improvements should be sought after in a market with intense competition because of inflation. 

However, in oligopolistic industries, where incumbents have a greater capacity to pass on cost increases through price increases that preserve margins, this incentive is muted.

Finally, because of the pandemic's high level of debt in the global economy and the rising interest rate environment we are currently experiencing, there will be less fiscal room going forward.

However, it is anticipated that the clean energy transition will require $3 trillion in investments annually for the next 30 years. In a world where supply is already constrained, the rise in aggregate demand will lead to further inflationary pressure if a sizable portion is financed with debt, as seems likely.

Increases in productivity across the board would mitigate the combined effects of these inflationary pressures. Technologies based on biology and the digital have a lot of potential in this regard. 

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However, their creation and implementation will take time. To reduce inflationary pressures in the interim, we can no longer rely on highly elastic supply responses. This new and more challenging reality requires a change in the monetary and fiscal policy frameworks.