Stagflation and not hyperinflation is going to be Europe’s biggest economic headache in the years to come, said Mario Monti, Italy’s former Prime Minister. Monti, Italy’s premier between 2011 and 2013, highlighted that economic recovery from the COVID-19 pandemic will be threatened by stagflation.
Stagflation is defined by economists as a period of slow economic growth that is characterised by high rates of unemployment while high inflation rates continue to remain prevalent. Situations of stagflation are harder to deal with governments as policy changes to bring inflation under control often exacerbates the unemployment levels and vice versa. The phenomenon is also known as recession-inflation. The 1973-1975 economic downturn that finally brought an end to the post-World War II economic boom was a period of economic stagflation.
Monti, who is an economist and the president of Bocconi University, highlighted that national fiscal policy adopted by countries to help businesses and individuals in face of the lockdowns through quantitative easing and similar methods “may well fire more inflation.”’
Inflation already hit a 10-year high in August in the Eurozone, with a 3 percent increase in prices of commons goods just over last year. Rising input costs due to critical supply chain breakdowns in the rest of the world, and demands for higher salary would also consequently be passed down to buyers, further increasing inflationary pressure.
However, production levels may soon find it hard to increase due to the prevalent conditions and restrictions on various enterprises, even if many sectors are slowly trendings towards pre-pandemic levels.
The IHS Markit Eurozone flash composite purchasing managers’ index recently hit a score of 59.5 in August against 60.2 in July. The index measures levels of economic activity through various manufacturing and services sectors, with a score of higher than 50 indicating economic growth and a score of 49 or lower indicating economic shrinking.
As the score dips, many experts, including Monti, believe that the economic inertia may soon be slowing down resulting in lowered levels of production.
Monti added that it would be very important to manage wisely and in a coordinated manner this transition from a “needed abundance of monetary and financial support to a more ordinary situation.”