Where is the inflation?

Since the beginning of the year, global growth has been improving, with a gradual acceleration of activity rates in both advanced and emerging economies. However, if the cycle has regained its rights, inflation, it remains absent from the radar screens, enough to challenge the central banks that use this gauge to guide their actions, and this at the very moment, the urgency being past, it is a question of starting or continuing a process of exit from ultra-accommodative policies installed since the crisis.

Traditionally, in the recovery phase, the firming of demand makes it possible to absorb unused resources both in the productive sphere and in the labor market, which, on the way, pushes up wages and prices according to a self-employed pattern. maintained. Today, it is clear that, despite the economic gloom and the decline in unemployment, the price indexes remain surprisingly wise, with rising rates that continue to gravitate, on both sides of the Atlantic, well below the 2% target in central bank mandates.

This singular combination of firm growth and weak inflation is partly due to purely conjunctural reasons. The slight rally in prices at the start of the year, driven by the near doubling of oil prices between early 2016 and early 2017, has stalled, as crude prices have stabilized since around $ 50 per barrel. More recently in Europe, the appreciation of the euro against the dollar is important for disinflation. However, these temporary factors alone can not explain the sluggishness of prices, as judged by the long-term weakness of the underlying inflation indices, suggesting more structural causes. Globalization and new technologies are part of the list of usual suspects.

Globalization and the development in low-cost countries of ultra-competitive industrial platforms, which fuels international competition, remain powerful factors of disinflation. The globally integrated value chain system also allows for global wage arbitrage with competition from less skilled workers. Given that China, India, Russia and its former satellites alone account for nearly 3 billion low-cost workers, this major supply shock has strong implications for the labor market and wage we. Thus, in the face of competition in a globalized world, the pursuit of competitiveness at all costs keeps wages under pressure, particularly at the bottom of the qualification scale. Moreover, with the global reallocation of production, the disappearance of industrial jobs in advanced economies has shifted to sheltered jobs that are protected but less productive, more flexible and poorly paid. Moreover, in a context of high unemployment and weak bargaining power of the workers, the wage indexing mechanisms, supposed to protect the purchasing power, gradually disappeared, and with them the second-round effects when prices and wages evolved. in parallel. Finally, technological innovations, along with the digital surge, are also pulling prices down. In industry, the robotization of productive processes increases productivity, which largely absorbs cost increases related to the need for highly skilled labor while allowing price reductions. In services, the digitization of cognitive and repetitive tasks, thanks to learning robots and artificial intelligence, as well as the development of direct linking platforms, which reduce the number of intermediaries along the value chain, also contribute to lowering costs, a trend that should continue and even expand. Witnessing these changes, the Philips curve, which shows an inverse relationship between inflation and unemployment, tends to flatten out, with a lower responsiveness of wages and falling prices of unemployment, which is synonymous with putting the market under tension. work.

At this stage, central banks remain convinced that, even if the transmission delays have lengthened, the cycle will end up imprinting its inflationary footprint, to encourage them to be cautious without forcing them to abandon their normalization of their policies. The Bank for International Settlements (BIS), the "bank of central banks", goes a step further by suggesting lowering the inflation target to 0% arguing that a permanently disrupted inflationary tally could lead to monetary policies that are too accommodating for too long at the risk of jeopardizing financial stability. Because if inflation deserts the real sphere, the stakes are moving towards the financial sphere where chronic instability is likely to develop with rampant asset price inflation, excessive credit growth and immoderate risk-taking by the quest for credit. profitability, in a context of low interest rates and abundant and cheap liquidity. Faced with this change in the inflationary regime, central banks will have to find the optimal compromise between monetary and financial stability, in order to preserve growth without risking a new crisis.