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  • Writer's pictureMathieu Provencher

Is inflation finally getting under control?

(1-Data taken from the World Bank)

Hello Everyone! I know I’ve made some predictions a few weeks ago, and I stand by them, but I wanted to take a bit of time to flesh out what those events might do to our economies, particularly for inflation.

As you may know, inflation has been high in most of the world last year. My previous three articles mention why we had so much inflation around the world. I explained that the inflation of today is a cumulative effect of two periods: (1) Second half of 2021 and (2) almost all of 2022.

However, contractionary monetary policy, using higher interest rates for example, by Central Banks around the world has helped reduce inflation.

Here’s the big question many Economists are currently thinking about: Are we going back to a world of close to 2% inflation for rich countries? Are we getting a handle on inflation again (inflation was indeed under strict control in rich countries from around 1990 all the way to the second half of 2021?

Although most Economists I have heard and read from are expecting inflation to be reduced in the coming few years, I have a very different conclusion. First, let me tell you why other Economists are expecting prices to go back to somewhat of a normal level in the next few years.

First of all, many of my colleagues think that most of the rich world, and a good part of less developed countries, will enter a recession in 2023, which is about now. This will probably lead to a significant reduction in the level of inflation of those countries (if it happens).

Most Economists also think that the high-ish interest rates (they are not that high by historical standards) in most developed countries will also push prices down quite significantly. The current reduction in inflation is explained by this monetary policy. Increasing interest rates has worked very well in the past (around 1990 in more developed countries with the use of formal inflation targeting) and most Economist assume that it will be the key to reducing inflation in the near future.

Now here’s where I diverge substantially from my colleagues: unless we are faced with a world-shocking event that will completely change the structure of our labour markets, such as almost full automation or an AI-lead revolution (I’m not talking about war with the machines here), then I expect prices, and probably inflation, to stay high for the next 10 to 15 years, if not a bit more. This prediction is especially aimed at today’s more developed countries but some of that inflation will be translated to less developed countries as well.

The structural change I have mentioned in my last few articles should, if it is indeed as important as I think, bring high levels of inflation, from 5% to 10%, for as long as the baby boomers are economically active (even in retirement). That inflation will be dragged into the next generation for another 3 to 8 years afterwards, albeit at a lower pace of perhaps around 3% to 5%.

If the shock I described in the previous article occurs, then no amount of interest rate increases will ever be enough to control that inflation. We will simply have to live through a decade or more of high inflation and low production (and perhaps productivity).

Well… I’m usually a pretty optimistic person and I rarely have doom-like scenarios to share with you guys but that one might affect you all in the near future. You may also be stuck with this for a relatively long time, which may affect some of your lives quite significantly.

There are already very impressive improvements in automation of all kinds of things (including for cooks) and AI is becoming freakishly intelligent and capable of fooling us. If the labour market shock I foresee occurs, firms and governments will have more incentives to invest in those technologies and we can avoid a relatively low production and high inflation period (we call that Stagflation) by innovating our way out of it.

If nothing else, I hope this idea has been entertaining for you guys. Regardless of the results, always try to stay adaptive and develop skills and knowledge that can be used in many different industries… that way you will be better suited to whatever labour market will come to be. One thing is almost certain: the labour market in 30 years will be very different from the one we have now, just like the one we have now is very different from the one of 30 years ago (for the most part).

Take good care of yourselves everyone and don’t forget to have fun!!!!

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