A complex interplay between unit labour costs, profit margins and pricing power will determine whether the current increase in inflation will be longer-lasting. Traditionally, in the early phase of a recovery, unit labour costs decline on the back of increased productivity. This should cushion the impact of higher input prices on profit margins. Subsequently, unit labour costs should increase but this does not imply that margins should decline. Given the strength of the growth acceleration, the fact that alternatives for meeting robust demand often do not exist and that going for market share makes no sense when faced with supply constraints, the conditions seem to be met for a rather significant transmission of higher input prices in producer output prices.
Indicators related to international trade remain very strong. Even though the most recent CPB figures are for March, world trade in volumes (both exports and imports) increased 2.2% m/m, pushing the quarterly rise to 3.5% in Q1 2021. This represents a solid growth that was almost identical to that recorded in the previous quarter.
Our barometer this week shows a phenomenon that is attracting increasing comment in the US: a significant rise in inflation as the Covid-19 pandemic recedes. Some people, including the Chair of the Federal Reserve Jerome Powell, are playing down the increase, while others, such as former Treasury Secretary Lawrence Summers and economist Nouriel Roubini, see it as a possible paradigm shift.
The easing of the pandemic has continued for the fifth consecutive week across the world. The acceleration of vaccination programmes has allowed a gradual reopening of economies. Visits to retail and leisure facilities continued to rise in the main developed economies, marking a return nearly to normal in the week of 28 May to 8 June.
