Corona and war not the cause of high inflation

Johan Cruyff, Willem van Hanegem, Arie Haan, Johan Neeskens. Willy van de Kerkhof. It has been a long time since they were seen in the Oranjeshirt. A very long time ago. In 1974, for example. That was also the last time that we had such high inflation in the Netherlands as it is today.

When talking about the current high inflation, the inflationary consequences of the war in Ukraine and recovery from the corona pandemic are often mentioned. As a result of the war, the prices of gas, oil and electricity have risen. Recovery from the pandemic has been accompanied by a huge surge in demand, weighed down by lockdowns and other measures, and many households forced to save a lot. In addition, the pandemic caused and continues to cause all kinds of logistical bottlenecks in the global economy.

No structural factors
This indeed drives prices up in the short term. But it is not a cause of the current high inflation, just an extra piece of it. In other words, they are not structural factors. Those temporary sources of high inflation fade over time. The forced savings will be spent, but not replenished (especially now with almost 12% inflation), the logistical problems will be solved and for a continued strong contribution from the energy sector, their prices must continue to rise at the same rate (mathematically, inflation is the change of prices now compared to 12 months earlier).

An aspect that is much less discussed – unjustifiably because it is much longer than the aforementioned matters – is the monetary policy of the ECB. The same applies to money as to any other good: the more of it there is, the less it becomes worth. There is only one reason why gold is more expensive than silver: there is much less of it. This loss of value of money is what we call inflation. Stripped of all frills, if a central bank wants to drive inflation, it must adopt a loose policy. If it wants to slow it down, it will require at least a neutral policy or, more often than not, a tight one.

Studying monetary history
As long as that doesn't happen, and that certainly won't happen in the eurozone for the time being, you should rather assume inflation that is too high than too low. Studying the (monetary) history teaches me that high inflation is undesirable for a number of reasons. High inflation is holding back economic growth due to increased uncertainty and higher interest rates. High inflation creates inequality and therefore also has non-economic consequences. High inflation thus weakens both the economy and society and indeed, as Ronald Reagan once said, is best viewed as "as dangerous as a mugger, as terrifying as an armed robber and as deadly as a hit man."

Edin Mujagic

Edin Mujagić is an economist and manager at Beleggingsfonds Hoofbosch. He focuses on global central banks, and in his blogs he writes mainly about developments in interest rates and inflation. He has also written several books.

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