The Economist: Covid-19 Could Lead to the Return of Inflation-Eventually, April 18, 2020.
The article by The Economist analyses the effects of global pandemics on the world economy, and its principal focus is on the current global pandemic, the Covid-19, and its impact on inflation. The article was published on April 18, 2020, by The Economist, though it is not assigned to a specific author. It carries out an analysis of the current global crises and its possible impacts on the world economy. However, the article centers on looming inflation that is likely to emerge after the pandemic.
According to The Economist, high rates of inflation were more common in the 1970s, but the current crisis threatens to bring back such scenarios. However, the author envisages a situation where inflation will creep in after the pandemic is over. At the moment, as the pandemic continues, high inflation is less likely to creep in.
The author argues that inflation will arise from the measures that governments have put in place to fight the pandemic. Such measures have restricted production and hence affecting the supply of goods. Many service industries and manufacturers have closed down, resulting in a reduction in the supply of goods and services. Consequently, the money in the economy is left chasing too few goods hence triggering an increase in prices, which means inflation. For instance, Smithfield Foods, a firm that deals with meat processing, closed shop after 200 staff in the facility, fell ill from the virus. Closing firms constrains supply and raises prices.
Besides, the article suggests that stimulus programs by governments in a bid to support workers and firms are a likely source of inflation in the future. Federal banks are increasing the supply of money in the economy without a subsequent increase in production. Such a move will hike prices in the market. For instance, state governments in America are competing for medical equipment whose supply is inadequate. Such an act forces the costs of the equipment to rise, resulting in inflation.
In the short run, the article foresees a situation of controlled inflation. According to the author, inflation won’t be experienced in the short term since demand is also low. Many workers have lost jobs and incomes as firms scale down operations in response to the pandemic. Therefore, the supply at the moment might even be more than the demand, signaling standard inflation rates in the short run.
Form the article, we learn that an abnormal rise in prices, which is simply inflation, is caused by several factors. They include excess demand compared to supply, overspending initiatives by the government, such as economic stimulus programs, among others. We also learn that global crises such as pandemics have profound effects on the global economy since they affect employment, supply, and demand for goods, as well as the money market.
Related Research
The article from The Economist analyses the impacts of the current health crisis on the economy and specifically on inflation. It is the first time the world is experiencing the Covid-19 pandemic, and therefore, there is limited information concerning the impacts of that pandemic on the economy. However, such a pandemic will inevitably lead to an economic recession globally due to the job cuts, reduced demand, closing firms, and constrained production of goods and services. Therefore, this related research is about economic scarring and the long term impacts of the recession. Scarring refers to the long-lasting damage to people’s economic conditions and the economy in general.
According to Irons (2009), economic recessions brought about disruptions on the economy by factors such as the Covid-19 pandemic have long-lasting consequences such as reduced incomes, high unemployment rates, and low commercial activities. More specifically, recession leads to constrained credit markets and reduced consumer spending, which hinders the growth of small enterprises and new ventures. This research focuses on the impacts of the Great Recession of 2008, which had devastating effects on the economy. The recession caused disruptions on the economy, leading to massive job cuts, reduced manufacturing and spending, and crumbling of financial markets, just like the Covid-19 is doing. That’s the reason I chose to research on recession since its impacts on the economy are similar to those of the current crisis.
The other available data analyses the long-run effects of pandemics on the economy. According to Taylor et al. (2020), global pandemics such as Covid-19 result in an increase in precautionary savings and reduced spending, the elevation of real wages, and reduced labor supply. The decrease in labor supply is attributed to the loss of labor force to the pandemic, while real wages rise in response to the reduced supply of labor. Firms have to raise wages to attract the few laborers in the market. Due to uncertainty, people tend to save more for emergencies.
Some of the notable pandemics that have shaped economies over the years date as early as the 13th century. They include the black death of 1347, the Italian plague of 1623, the great plague of Sevilla (1647), the great plague of London (1665), the great plague of Marseille (1720), the first Asia Europe Cholera pandemic (1816), Russia cholera pandemic of 1852 among others. These plagues happened across Europe and changed the economies thereafter. According to Taylor et al. (2020), real wages rose gradually for three decades after the pandemics. That is attributed to the reduced workforce. From such findings, we can anticipate a rise in real wage across the globe after the pandemic due to reduced availability of skills in some sectors
Existing data shows that great historical pandemics of the in the last millennium usually result to diminished returns on assets, a rise in the real wage, prolonged periods of low investment opportunities mostly due to excess capital needed for each surviving labor force, and an increase in the desire to save among the population for precautionary purposes or in a bid to restore depleted wealth during the crisis. However, Taylor et al. conclude that if low-interest rates are maintained in the coming decades, governments will have an opportunity to handle and correct the consequences of the pandemic.
According to Irons (2009), economic recession as a result of a disruption in the economy results in negative impacts in the economy, especially in the long-run. Among them is scarring, which implies damages to people’s lives and the economy in general. Due to reduced production, the closing of firms and industries, reduced travel, and crumbling of the tourism industry, there is no doubt the world economy is headed to a recession once the pandemic is over. Therefore, according to Irons (2009), some of the long term effects of the recession that we should expect after the pandemic are; job losses and reduced incomes, which would force families to adjust their way of life. Families might delay or forgo college education for their children. Recession would lead to economic losses, affect education, reduced investments, and reduced economic mobility.
While the economy is likely to experience robust growth during the recovery periods as unused capacity is returned to work, such growth is witnessed in the short run. Irons (2009) outlines that economic recession affects education negatively. That is because children joining early childhood education programs or colleges is dependent on the parents’ financial capability. A recession that causes job losses affects the access to education by the masses, and that affects the quality of the workforce in the market. Even the working population cannot advance their skills through further learning due to constrained economic conditions. Among the potential long term effects of the current Covid-19 pandemic are reduced education and labor force standards.
Besides, the economic recession would affect economic mobility. Job losses would result in more low-income families. Such families offer fewer opportunities and worse economic conditions to their children in terms of poor nutrition, low-quality education, and poor access to wealth. According to research, financial outcomes and especially wealth distribution, are passed from one generation to another (Irons, 2009). Therefore, the effects of economic recession are not only experienced by current generations but also future populations. Consequently, the long term effects of the current pandemic will affect not only the present age but also future ones.
The reason why I chose the article from The Economist on the possible effects of the Covid-19 pandemic on the economy is due to its applicability in the present world. It is a crisis never experienced before, and therefore information on the effects of such a pandemic is limited. When I found an article highlighting the economic impacts of the crisis, I found it very insightful