Three potentially positive effects of inflation

Inflation is here to stay, rather than transitory, no matter what central banks are telling us. But rising inflation could help make the global economy more efficient. Here are three potentially positive consequences of high inflation:

Less consumption

In the West, people have long turned into “consumers”, and they are drowning in stuff. One of the most popular clothing retailers in the UK is Primark, which sells cheap, fast fashion.

And while at the height of the Covid-19 pandemic Primark, which does not sell online, was shut, consumers sent the sales of online retailer Amazon soaring, with demand for deliveries increasing manifold.

People are also increasingly buying cheap houseware, which finds its way in the bin after a few uses.

In 2019 — the most recent year for which data are available — households in the UK generated 26.4 million tonnes of waste. Of this, only 46% was recycled.

Rising inflation could force consumers to rein in their spending and perhaps opt for longer-lasting, less wasteful clothes and other goods.

The end of offshoring

Offshoring – moving production to cheaper locations, often in far away countries – has been a feature of the past 40 years.

Western companies opting for cheaper labour and more “flexibility” in what regards labour rights such as holiday days and pay, medical leave etc. have helped China rise to its current status of the world’s second-largest economy.

Not just China, but most other emerging markets have benefited from this, directly or indirectly. Western companies have either invested there directly, or have bought products made in some developing countries to use in factories located in others.

The shortage of semiconductors (made mostly in Taiwan) has had a knock-on effect on sectors from auto manufacturers to kitchen appliances makers, and has shown why offshoring is not always a good idea.

Emboldened by their ability to rise prices, companies in developed countries may bring some of their production closer to home. This would give a boost to employment in areas of these countries that have become pockets of poverty.

Western consumers buy too many things, which end up in the garbage. Source of image: Pixabay.

Western European companies could opt to either produce in the cheaper areas in the home country or in closer locations such as Eastern Europe. US firms could take another look at states where unemployment is high and decide to invest there.

Rising business confidence

You wouldn’t necessarily expect it after the extraordinary past couple of years, but companies are in fact increasingly bullish about their ability to increase prices.

Most companies became “extremely bullish” about demand in the second quarter of the year, and “the theme continued this quarter,” according to a recent report by Deutsche Bank Research.

Despite slowdowns in sales growth and flat-to-down earnings, companies in the US and Europe remain optimistic, saying that demand is very robust.

Most companies cite supply constraints as keeping them from fulfilling the much stronger than expected demand.

For most businesses, raising prices is a matter of when, not if. “They are also looking to play offense now by raising capex and buybacks, with deleveraging taking a back seat,” the report says.

In other words, companies will be looking to invest in new lines of production, raw materials etc. or reward their shareholders, rather than focusing on paying down debt.

This looks like a smart decision, at least for the time being: in these inflationary times, debt turns from a liability into an asset, because central banks continue their policy of negative real interest rates.

Inflation is bad for consumers and companies in the long run, but there is no denying its positive effects in the short run. This makes central banks’ mission of keeping it in check even more important, but also trickier.


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