High levels of inflation could persist longer than central banks have suggested. The Organization for Economic Co-operation and Development (OECD) has released its summer outlook for 2021. The Intergovernmental Agency for Advanced Economies has revised Canada’s inflation forecast upward. Not little either, they now see the inflation rate expected to double next year. The agency further warns that risk is on the rise, potentially indicating more to come.

High inflation is not a global story

High inflation is not the universal story presented in Canada and the United States. Researchers have observed elevated levels in only a few countries, such as Canada, the United Kingdom, and the United States. Other advanced economies, such as those in the EU and Asia, suffer from low inflation. “… Inflation expectations are still anchored, but short-term risks are on the rise,” says the OECD report.

Canada Inflation Forecast Revised Much Higher

Canada’s inflation forecast has been revised significantly upwards as the OECD sees more upside risk. In 2021, the agency now expects annual growth of 3.1% of the consumer price index (CPI). This is an increase of 0.3 points from the previous forecast for May. Slightly lower than the title of 4.1% last reported, implying that it cools towards winter.

OECD Headline Inflation Forecast September 2021

Source: OECD.

However, the cooling does not bring inflation back to pre-pandemic levels. In 2022, the forecast climbed to 2.8% annual growth, up 1.4 points from the previous forecast. Yes, the expected growth rate has doubled for next year after just a few months.

Inflation risks are on the rise as economies reopen

The high inflation problems might not end there, the risks being even higher. Analysts warn that if pent-up demand is higher than expected, prices will rise further. “Short-term inflation risks are on the rise, especially if pent-up consumer demand is stronger than expected,” the agency writes.

The main factors behind the rise in inflation are the prices of raw materials, shipping and labor. The prices of commodities and shipping tend to affect the cost of almost everything. The OECD expects this to continue contributing to inflation until next year. They believe this will be true, even if the cost of these inputs does not increase further.

Inflationary wage hikes to cope with vacancies can make high inflation sticky

The labor shortage is one of the biggest issues with the soaring vacancies. This can lead to wage compression, that is, an unproductive increase in wages. If the growth of non-productive wages stimulates inflation more, they see less transitory inflation. It is more difficult to cut wages than to pass costs on to consumers.

Is the rise in inflation still transitory? Sure. Everything is transitory over a sufficiently long timeline. High inflation for more than two years, with growing risks, means that this may not be a problem in the short term.

The OECD suggests that easy monetary policies should last as long as necessary for recovery. Central banks should, however, communicate publicly where they draw the line. If something isn’t very effective and is harming the audience more than it helps, it’s time to consider whether macro tools are needed.

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