Reading the ISTAT document “the forecasts for the Italian economy in 2021-2022”, released on 4 June last, is striking. We realize very well how the world, it is appropriate to say so, has taken the path of recovery, thanks to vaccinations that are gradually putting the pandemic under control. More in certain parts or sectors, less in others. Already accelerating here, still almost stationary there. USA and China already ahead, Europe further back.
Also in Italy: manufacturing production is in sharp recovery, services and tourism are still struggling a lot. In the end, however, the Gross Domestic Product (GDP) is expected to grow by 2021% in 4,7 and by 4,4% in 2022, up from forecasts made in the very first months of the year. And so is the occupation.
Reading the ISTAT strikes another thing. Nothing we didn't know, but it strikes. We have to imagine the world as being wrapped in a spider's web. In some points more solid and compact, in others less. Everything is strongly and closely connected. Trends and data that intertwine. A great complexity, difficult to grasp in its "red threads".
Globally, there have been sometimes even heavy shortages of raw materials. We read a few days ago about car manufacturers unable to produce because they lack supplies of components. Or producers of still peeled tomatoes because they can't find the tin cans to pack them. Rising cost of the rental of containers with which goods travel today, due to the great demand that exists.
On the other hand, globalization in the last twenty thirty years has spread the manufacturing of products or their parts all over the world, which then travel to the final assembly and packaging sites. Before that, the raw materials travel to the places of production. Then, the finished products travel to the sales markets. They are the so-called value chains. The cobweb.
We simplify. The markets restarted rather suddenly. The pandemic had caused significant slowdowns, if not blocks, of production. Due both to the limitations imposed everywhere, and to the prudence of companies with respect to a very uncertain future. It had stopped (almost) everything. Raw materials were no longer supplied, intermediate products were no longer manufactured. Reduced oil extraction. No more replenishment of warehouse stocks. And so on. Shortcomings, shortcomings.
Starting again so strongly and in such a short time immediately exposed these shortcomings. Within days, not months. This immediately led to an increase in their prices. It is the normal law of the free market: the more there is demand for something, the more its price goes up.
In the end, those who produce have higher costs because, even if they somehow manage to procure them, they pay more for the raw materials they need. That greater cost will sooner or later come to the final consumer who pays a higher price than before. Higher prices can eventually lead to higher inflation, as we all know well.
This is why for some time now politicians, economists, technicians, governments, central banks have been heard on TV or read in newspapers about inflation which is raising its head. In May there was a 2% increase in consumer prices in Europe, compared to 1,6% in April. All concentrated on these issues, especially for the fear that it will rise too high. They tell you that inflation should never be higher than 2% to maintain conditions, let's say basic, functional to healthy growth of economies.
And almost everyone agrees that, at least for the moment, everything suggests that the rise in inflation is not structural and that it will not last. It is an overheating, due to the objective global conditions of the economies which all together almost suddenly started to move again.
They tell us: it is only a passing malaise, within the year it will be overcome, everything is under control. But what does inflation matter to us? Why do we talk about it? Meanwhile, trivial, if inflation rises and does so in a stable and consolidated way, structurally, it reduces the purchasing power of everyone: by raising prices, if we first bought at 100 then we buy at 120, so to speak. Unless those who work then ask to increase the remuneration, whatever the way in which this happens (state intervention, union actions, etc.) to recover that affected power.
There is more. If inflation rises too long for too long, governments and central banks (such as the ECB in Europe or the Federal Reserve in the US) intervene to cool it down. Through the levers of monetary policy, interest rates (those that regulate the cost of money) are generally raised. Today they are almost around zero almost everywhere. It means that those who want money to invest in assets can buy it at very advantageous conditions.
It could also mean that the ECB (and Federal Reserve) buy (and therefore hold) far fewer government bonds, as they have been doing for some time now. They call quantitative easing.
The ECB had begun to do so under Draghi's presidency. In very simple terms, with these purchases they flood the market with liquidity and thus stimulate the entire economy.
For Italy this has allowed - and continues to do so - to keep the famous down spread (the difference in yield with German government bonds, which are safe by definition). The ECB still buys many Italian government bonds, and so much demand keeps prices low, that is the yield on bonds that the Italian State must guarantee to those who buy them.
Without the ECB, the untrustworthy financial markets in Italy would have worked to make that yield soar. In fact, we avoided the speculation that it would sink us. If the ECB stops, as the markets may return to not having too much confidence in our resilience, the spread could rise again.
With the obvious negative consequences for our public accounts: the state pays higher interest on securities and thus increases spending. Having a huge debt, it would be very risky.
The increase in inflation could therefore have an upward effect for Italy on the interest it pays on its public debt. Those who invest in government securities are asking for a higher return to compensate for the erosion of their capital caused by rising inflation.
It is much more complicated than that, but from these few things one can already perceive how and how everything is closely connected and how the consequences of distant events reverberate everywhere. Things that we don't care about, but that can ultimately affect us hard. The cobweb.
In our own small way, we can do nothing but work to make the most of the mass of billions of euros that Europe gives us to restart and develop our economy, making the reforms of which we hear so much, and going towards the future better equipped. All the more so, knowing that those euros will not be free.