TPT January 2024

INDUSTRY 360

Subduing inflation: The threat is diminishing but central banks remain vigilant

By Eric Lundin sales engineer and marketing manager, T&H Lemont Inc

THE global financial crisis that erupted in the US in 2007 and in Europe in 2009 cast a long shadow over the world’s economies. The causes of the financial crisis largely concerned defaults on debts, mainly mortgage debt in the US and government debt among five members of the Eurozone. As the crisis spread, some economists predicted a synchronised downturn among the world’s advanced economies, which eventually came to pass. The recovery was long and gruelling. In Britain, the road back to full employment took seven years; in the US, it was a decade; Greece, one of the countries that defaulted on its debt, still hasn’t returned to full employment. Was it a once-in-a-lifetime event? A once-in-a-generation event? In short, no. Covid-19 also resulted in a widespread and synchronised downturn in economic activity. And while the resulting inflation has persisted for some time, many countries have been employing sound economic countermeasures that are reducing it to manageable levels. Inflation: a bane or a blessing? Inflation, or price inflation, can come in two forms. One is through some sort of a shock. A typical example is a drought that sends agriculture product prices skyward. Another is a severe storm that halts offshore oil extraction, limiting the oil supply and boosting the price of petroleum products. The second form comes through monetary policy. Money acts like any other commodity, obeying the law of supply and demand. So, when the money supply increases, the currency’s value falls (the rate of price inflation increases). When the money supply decreases, the value of the currency rises (the rate of price inflation decreases). Central bankers often take these actions, adding money to an economy that is moving too slowly or removing money from an economy that is running a bit too quickly. The goals are to prevent a slowing economy from slipping into a recession and to prevent a robust economy from setting off a round of inflation. Noteworthy is inflation’s opposite, deflation. When prices fall, consumers have an incentive to put off purchases, hoping that prices will continue to fall. This decrease in demand leads suppliers to cut prices to spur sales. Editor’s note: In this new TPT magazine column – Industry 360 – contributing writer Eric Lundin addresses economic issues and trends in various industrial sectors that affect the global tube and pipe industry.

As prices fall further, consumers have an even greater incentive to delay purchases, creating a downward spiral. While rare, a deflationary cycle usually indicates a structural problem that resists remedies. The government of Japan have been dealing with deflation for 25 years. Full employment and low inflation Policies are often influenced by a blend of the past and the present. But, the past and present aren’t necessarily balanced. In the US, present needs tend to dominate. A recent example of persistent inflation took place throughout the 1970s. A combination of rampant government spending, the oil shock of 1974 and loose monetary policy were to blame. A series of interest rate hikes culminated in a peak discount rate of 14 per cent in 1981 and two severe recessions followed. Still, the Federal Reserve Board didn’t maintain an especially vigilant position, resuming a relatively loose money policy shortly thereafter. The European Central Bank, with headquarters in Frankfurt, is extremely averse to inflation. This is due in part to Germany’s financial position in 1918. The government’s debt was extraordinary and the Treaty of Versailles stipulated a war reparations plan that was doomed to fail. In desperation, Germany’s government printed currency as fast as it could, inciting an epic instance of runaway inflation.

Figure 1: The Money Supply for Select Economies. The supply of euros, pounds, and yen increased 42 per cent, 46 per cent, and 38 per cent as a result of Covid-19. In the US, the supply of dollars quadrupled. In this graph, all of the currencies are indexed at 100 in January 2019. The left-hand scale measures dollars; the right-hand scale measures the other currencies listed in the chart. Source: The Federal Reserve Bank of S. Louis (St Louis, Missouri, US).

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JANUARY 2024