Even if full normalcy is still a long way ahead, shops are reopening, vaccines are rolling out and people are ready to return to ‘life as we knew it’.
Closing the remaining slack will keep providing impetus to economic growth, but there is evidence that the speed of the recovery is slowing down at a time when risks are looming.
Chief amongst these is the possibility that the US Federal Reserve’s (Fed) credibility is about to be tested if inflation continues to increase. It is true that current inflationary pressures were generated by supply rather than demand:
- Global suppliers struggled to predict demand for their products as the economy adopted a stop-and-go pattern of reopening. This created shortages in areas such as semiconductors.
- Dislocation of global supply chains as containers and container ships were not made available quickly enough.
- When Covid-19 hit, many companies decided to run down their inventories to preserve liquidity buffers, so stockpiles were too low when the recovery in demand started.
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