Even if some commodity and energy prices have peaked, any drop in headline inflation from negative energy base effects will not materialise at the start of 2022. Instead, energy base effects look likely to push up headline inflation in the first few months of 2022. At the same time, cost-push inflation is gaining momentum. Here, producers’ selling price expectations are close to, or at, record highs and even in the services sector, selling price expectations are now close to all-time highs.
Traditionally, it takes between six and twelve months before any pass-through from higher producer prices to consumer prices materialises. There are no standard estimates for this pass-through as pricing power differs depending, for example, on the state of the economic cycle or the level of competition. In the current situation, both in the US and eurozone, high backlogs in the manufacturing sector and cash-rich consumers suggest there is strong potential for a significant pass-through.
On top of this, the lack of skilled workers has already started to exert upward pressure on wages. In the eurozone, despite some slack and furlough schemes, the labour market has recovered unexpectedly fast and is also showing the first signs of a supply-demand mismatch. Add to this inflation-indexation in some countries, and unions focusing on wage rises instead of job security in others, and we should see higher wages next year as well.
Inflation Outlook 2022
All of the above suggests that elevated inflation levels will be ‘transitory’ but this period of transition could be longer than previously anticipated. Even if some of the one-off factors fade out of Year-on-Year inflation next year, the delayed pass-through from higher producer prices as well as lockdown-related price volatility could still impact inflation far into 2022. As a consequence, we see headline inflation slowing in the second half of 2022 but still staying above pre-pandemic levels.
The disinflationary period of the last decade was not only the result of the balance sheet recession and subsequent deleveraging and low growth but also a result of two external developments: the emergence of China in the global economy and cheap labour as well as digitalisation (price transparency, competition and making services mobile).
In addition to the trends mentioned above, including wage-price spirals and sustainably higher commodity prices, it is important to assess how these two major ‘external’ drivers will shape inflation in the coming years. Regarding globalisation, it could in fact be more de-globalisation, protectionism and regionalisation of supply chains which push price levels higher. Also, with China’s ambition to become a fully developed economy, the country’s role in the global economy could become inflationary rather than disinflationary. Sure, there is still an enormous pool of untapped labour, be it in Africa or Asia, but the question is whether these regions will be able to take over the role of cheap labour provided by China quickly or whether this will only come with a long delay. Some economists even claim that the ageing of the global population and the adverse trend of the dependency ratio will result in higher real wages leading to greater inflationary pressure. Even the Japanese experience seems to indicate that an ageing economy has a preference for low inflation.
The disinflationary impact from digitalisation, however, could last a while. Price transparency, increased competition and services becoming mobile have exerted disinflationary pressure on most economies over the last decade and are likely to continue to do so over the coming years. On a different note, it is still unclear how the costs of the energy transition will affect inflation going forward. Don’t expect permanent upward pressure on prices but rather inflationary spikes on the back of carbon pricing or higher or new taxes. It is very early to draw strong conclusions about longer-term inflation trends on the back of the pandemic, but these moves could be far more relevant than most of the transitory factors mentioned above. Changes to underlying inflation trends will not cause large jumps in the immediate outlook, but if indeed a somewhat higher trend in inflation emerges in the aftermath of the pandemic, this would be key for central bank policy.
All in all, inflation is expected to remain at elevated, albeit lower levels than at present, until at least mid-2022. Once all base effects and one-off factors have petered out, inflation will still not return to pre-pandemic levels as there are many good reasons to believe that former structurally disinflationary drivers will become inflationary in the years to come. In the case of Belgium, inflation could even remain above 2% on average in 2022, as Belgium is more exposed to shocks on the price of energy and as automatic wage indexation (a particularity of the Belgian economy) is likely to boost wage cost and so… inflation.
Peter Vanden Houte, Chief Economist ING Belgium
Philippe Ledent, Expert Economist ING Belgium
The most frequent questions immigration providers receive from clients are:
∞ What Brexit scenario should we prepare for?
∞ When should we start preparing?
∞ How should we prepare?
Answering these questions is difficult, but not impossible.
Preparing for a soft or a hard Brexit?
So what scenario should you prepare for? To answer this question, companies should look at what decision makers are currently doing. Both in the UK and in the EU (at EU and at national level) decision makers keep highlighting their commitment to finding a deal. However at the same time, everyone is also preparing for a no-deal scenario. For example, the French government published a draft law in November 2018 to create a no-deal legal framework. Other countries, such as Germany, Netherlands, Sweden, Italy, Czech Republic have made public their no deal preparations as of the beginning of 2019. In addition, the European Commission published three communications last year – one in July, one in November and one in December – urging all stakeholders, from national administrations to citizens and economic operators, to prepare for a hard Brexit.
This is indeed the most cautious thing to do. On the one hand, possible disturbances caused by a hard Brexit could be very costly for companies. On the other hand, all the efforts put into preparing for a hard Brexit would not be wasted if, eventually, a soft Brexit occurs. Why? Because the hard Brexit and the soft Brexit scenarios are in the end not so different from each.
Three main aspects distinguish them. The first one is the two year transition period (30th of March 2019 – 1st of January 2021) which would be implemented only if the Withdrawal Agreement is ratified and enters into force by 30th of March 2019 (soft Brexit).
The second one is the level of protection to be granted to UK/EU nationals residing in the EU/UK prior to the Brexit day (less generous in case of a hard Brexit). And the third one is the nature of the future EU-UK relationship. In a hard Brexit scenario there would be no time to negotiate. So, from an immigration perspective, we would fall back immediately on already existing immigration schemes (GATS mode IV, EU permits, national permits) as of 30th of March 2019. This does not mean however that, in the future, this could not be re-negotiated and amended. In a soft Brexit scenario, there would certainly be talks about the future arrangements during the transition period, and some more ambitious schemes could be put in place.
Nevertheless, understanding what impact Brexit will have on current employees and future employees is crucial for all businesses. And some of this analysis will be the same in both scenarios. The major consequences will be felt only two years later if there is a soft Brexit. Yet, the sooner companies start preparing, the better chances they stand to avoid all possible disruptions and negative consequences on their employees.
When should companies start preparing?
Ideally, preparations should already be on-going. Although there is still a lot of uncertainty, companies and employees can already take steps to protect their rights and prepare for the future, irrespective of what the future will look like. All concerned people must make sure they are making use of all existing tools and schemes already in place and that they are ready for when new ones will be available for them.
How should companies prepare?
The first thing to do is classify the stakeholders within the company who will be impacted. Some of the stakeholders are easy to identify: EU nationals locally hired in the UK or UK nationals locally hired in an EU country. But Brexit might also have an impact on cross border workers, business travellers, employees temporarily assigned in the UK or an EU country, and even third country nationals in some situations. Moreover, Brexit will also impact future employees. Therefore, recruiters and HR departments must be aware of how their work will be influenced by Brexit.
Once the stakeholders are identified, it is crucial to put a communication strategy in place with tailored messages to all groups of stakeholders. Employers should reassure employees to make sure they retain them. In addition, they should train recruiters and HR specialists to help them understand the implications of a soft or a hard Brexit.
The third step – not necessarily in a chronological order as some of these steps can be taken simultaneously – would be to collect data about the impacted employees. It is no longer sufficient to know who they are. Companies must also have information about their length of stay in the host country, nationality of their family members, type of employment, employment conditions, education, etc. All of this data is necessary to create preparedness strategies and contingency plans.
And lastly, get ready to implement these strategies and plans. Brexit is an ever changing landscape and is very difficult to keep up with. There are no exact deadlines, no exact timelines, no precise outcome. Companies must be flexible. They must make sure they have all the necessary resources and are ready to act at any time. With all the uncertainty around Brexit, only one thing is certain. As cliché as this may seem, companies should definitely hope for the best, but prepare for the worst.
With thanks to Andreia Ghimis, Senior Consultant EU Government and Client Advisory at Fragomen