Enter Covid-19, a crisis that has perpetuated these chasmic inequities, leaving deep scars and a growing bifurcation between the “haves” and the “have nots”.
Inflation is just one of the many mechanisms through which the Covid-19 crisis is supersizing pre-existing inequalities. The most glaringly obvious is asset price inflation, but we have also seen changes in consumption patterns, increasing the cost of living in real time while the pandemic grips the world.
A recent study by Harvard Business School economist Alberto Cavallo finds that because Covid-19 has significantly altered what consumers are actually purchasing, real inflation is actually more than double the price change reflected in many official indices. Typical “baskets” of goods and services have not been adjusted despite the fact that the pandemic has disrupted peoples purchasing habits. This has led to significant distortions in the measurement of inflation relative to the real increases in the cost of living, based on altered consumption habits.
So, inflation exists in components that official CPI measures underestimate: house prices, healthcare, education and childcare. Inflation for the asset poor exists via a loss in purchasing power. Furthermore, as the Covid-19 pandemic gripped the global economy in 2020, inflation has been mismeasured via altered consumption patterns. So, what about 2021?
Inflation overshoot – a profound regime shift
The initial impact of the crisis has been disinflationary, in price indices at least. Beyond that however, change is afoot, and we see increasing capacity for inflationary pressures to emerge in official measures over the next 12 months, in turn pushing longer-dated bond yields higher.
One only has to look at container freight costs, food price indices, ISM price gauges, PMI surveys and the recent run in commodity prices to see that price pressures are in fact already here on the supply side. Coupled with an aggressive demand bounce back accompanying vaccine rollout, the impact of Covid-related supply bottlenecks and green policy agendas, headline inflation will not be hard to achieve – especially against incoming low base effects.