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Alot of money was pumped last year by the governments to finance the economic recovery; acute blockages in the supply chains; a growing demand for products and raw materials. What can all this mean, other than straw thrown on the already burning fire of rising prices? Economists around the world are wondering “where could inflation go in 2022?”, making it seem the main economic threat this year. According to The Economist, we are facing a bifurcation: on a road, the increase in prices is slowing down from month to month, and so the inflation would reach a “normal” rate of 2% by the end of the year. On the other road however, the consumer prices would rise with the same intensity as they did in 2021, and the inflation will remain high throughout the next year.

But no one can say for sure which way the global economy is heading. And, through the thick fog of economic uncertainty, the world is rushing in the recovery race by pushing the accelerator pedal to the bottom, but having at the same time the parking brake up. The ongoing pandemic, which receives new resources from a mutant coronavirus, remains a high risk for maintaining barriers in the global supply chains. Although the experts think that 2022 will bring significant growth, the trend of globalization generated by the blockages imposed by the pandemic is proving to be – in addition to inflation – a major challenge for the global economy in the next decade.

If the pandemic is allowed to play the fool again this year, the appearance of vaccine-resistant COVID variants could mark a return to economic blockages, which could reduce global GDP by “a cumulated amount of 5.3 trillion dollars in the next five years as compared to our current projection”, according to the IMF chief economist, Gita Gopinath, quoted by Deutsche Welle. PwC`s Global Economic Watch report announces that the global economy will advance by 4.5% in 2022 if the impact of the Omicron variant is limited and the measures implemented will ensure adequate protection against serious illness.

The forecasts warn that tighter financial conditions will follow, as the central banks in the advanced economies will increase their monetary policy rates and reduce their quantitative lessening programs. And the pressures generated by the disruption of supply chains will dissipate, according to PwC forecasts, given that there was an improvement in the last months of the past year, which will continue in 2022. This trend will reduce the inflation by the second half of this year, giving the central banks a respite to postpone potential increases in monetary policy interest rates, especially if the economies face additional problems such as unexpected epidemiological changes.

The disruption of the supply chain was another unforeseen development that blew up inflation forecasts. But while the pandemic has caused some real bottlenecks in the production networks, most economies produce much more than last year: for example, production and maritime transport in the US and on the global market have risen sharply, says Jason Furman, a professor of Economic Policy Practice at Harvard Kennedy School and Senior Fellow at the Peterson Institute for International Economics (former Chairman of the Board of Economic Advisers to President Barack Obama).

But the extraordinary $ 2.5 trillion fiscal support for the US economy in 2021, accounting for 11% of GDP, was much higher than any previous fiscal package after World War II, and the presence of this money in the economy “ lit” the increase in prices.

In a recent article, the economist Jim O’Neill pointed out that inflation is one of the most urgent and topical issues other than the COVID-19 pandemic. And Bloomberg analysts, reviewing the biggest economic risks of 2022, said that, for the question “what could go wrong in 2022?”, a definite answer is “inflation”, among other possible answers such as “Omicron”, “the collapse of Evergrande in China”, “a new euro crisis”, “rising food prices in the Middle East”, “rising interest rates”, “tensions between Russia and Ukraine”.

Much of today’s inflationary pressures may continue to be linked to the speed of recovery in many economies, but also to large, still persistent, disruptions in the supply chains. Rising inflation fears in 2022 “overshadow a robust economic recovery” shows also S&P Global Ratings in its economic prospects for the first quarter of the year. The pandemic continues to wreak havoc in some parts of the world, but although the virus spread is not fully contained and its economic impact has clearly waned, the economic recovery has led to inflation concerns.

The initial thinking – S&P experts say – was that there would be a modest and temporary rise in inflation at the beginning of 2021, as the economies reopen; nevertheless, the events turned out differently. The pressures on prices persisted and expanded more than expected. The index of personal consumption expenditures in the US increased to its highest level in the past three decades, and the harmonized index of euro area consumer prices also reached an all-time high. In the emerging countries, the inflation continued to rise, mainly reflecting the energy prices.

The inflation throws a heavy problem on the table of all central banks. And the ECB has the hot potato on the table and no one seems to know how to grab it. First of all, forced to intervene – by financing the sovereign debts – to support the euro area states in combating the pandemic effects, the ECB has created a surplus of money, experts Jürgen Stark, Thomas Mayer and Gunther Schnabl recently showed, defining the “existential dilemma” of the European Central Bank. More money in the market means consistent demand, a demand that faces a shortage of supplies and pandemic blockages in supply chains.

The supply chain disruptions played a key role in halting the global recovery in 2021, and the experts expect the supply blockages to continue to affect the economic growth, although there is hope that the supply deficits will be reduced as transport costs decline and chip exports increase.

But the supply chain disruptions cannot be eliminated until new relevant ocean transport capacities are implemented (and the forecast horizon for this is 2023 at the earliest), or the supply chains are adapted to ”nearshoring” (the practice of transferring a trade operation back, as close as possible to the market). And the more persistent the supply chain disruptions prove to be, the more the inflation is expected to continue to “boil” for most of 2022, putting the central bankers – but also everyone’s pockets – under pressure. Also, regarding the resources, a slightly more optimistic view have Morgan Stanley analysts, who think the supply chain disruption should dissipate this year. US supply chains are on the verge of recovery, which is why some US economists think that also the increases in commodity prices are about to diminish. But what is true for America is not necessarily true for Europe.

The uncertainty about the economic outlook is now probably the biggest since the beginning of the pandemic. Europe is “red” and the euro area struggles to control the new wave of Omicron infections. The disruption of economic chains caused by the pandemic has led to a wide range of supply blockages in the past year, in areas such as raw materials, intermediate goods – including semiconductors – and the transport of goods (as well as on the labor market).

Suppliers’ efforts to build buffer zones in response to the threat of scarcities of certain goods have contributed to shortages, exposing the vulnerabilities of the “on time” global supply networks. Meanwhile, supply – demand imbalances have been exacerbated by a pandemic-related shift in demand from services to goods. These imbalances have not only been a constraint on the global industrial recovery from the pandemic shock, but they have also contributed to the increase in inflation.

And now caution is required. According to ABN AMRO analysts, first of all we should be careful in generalizing the supply issues. The direct effect of the pandemic crises on production units and supply chains leads to increased tariffs for container transport, semiconductor deficit and labor market distortions. If one of the key assumptions for ABN AMRO’s outlook proves to be correct – namely that 2022 will have fewer pandemic disruptions as compared to 2021 – this should imply a mitigation of these supply bottlenecks this year.

And if another key assumption – that the reopening of supply channels will support a shift in consumption from goods to services – is maintained, this would also help to reduce these imbalances between supply and demand. The first indications of a certain decrease in blockages are visible in the tariffs for container transport (which have fallen by 10-20% in the recent months) and in some improvements in the monthly increase in delivery times for semiconductors.

It should be noted however that the spreading of Omicron and/or other new COVID-19 variants may delay the supply chain normalization process and therefore make supply disruptions even more persistent than they have been before. The result of state liquidity injections and freezing of supply chains is seen in the rising prices, which are likely to become endemic through subsequent wage increases. Many governments and central banks – anywhere in the world, in the US, in the euro area or in countries like Romania – have to take seriously the risk of a wage – price spiral. In some strong economies there are a few indications that this is happening now, but in more fragile economies, the social policies are already oriented towards “making things right in citizens’ interest”.

Secondly, the energy prices have scared and continue to scare most economies, especially the energy-intensive ones. The European promise of “green transformation” is not only far from helping us now, but it is even more obvious that the process of “greening” the energy itself cannot take place without fuelling the inflation.

And the debate now is whether the inflation is transitory and it will gradually fade, or it is persistent and it requires a political response sooner than planned. A confusing situation is now the only certainty of the beginning of year, about which BlackRock analysts think it marks “a new market system, different from the one of the past half century”. According to them, 2022 is the year with a unique combination of events, all of them governed by uncertainty: the economic restart, new strains of virus, inflation and pressure on central banks and – not least at all – the recovery of supply chains.

So, let’s start 2022 with high hopes, but still navigating through confusion. But no one dares yet to say “how expensive” 2022 will be.

Daniel Apostol

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