When I moved to Poland 25 years ago, inflation here stood at 14.9%. Given that only seven years earlier, in 1990, it was 585%, having got it below 15% was quite an achievement. In 2015 and 2016, Poland actually had falling prices. But now, consumer price inflation stands at 13.9% - stoked to a significant degree by government handouts intended to win votes. Economists predict it will peak between 15%-20%.
With petrol around 8zł a litre, household gas costing twice as much per cubic metre as it did a year ago, and food prices soaring, people are talking about little else when you strike up a conversation.
But how should we deal with it - as consumers, employees, and voters?
What to do? You can put off purchases like clothing and a new car or some building work, but food and fuel isn't anything you can do much about, other than buying cheaper cuts and using less fuel. But should you put off capital projects, building works? Prices of building materials have rocketed and those builders that are willing to do the work are short-handed (so many Ukrainian builders have returned home to fight for their country). As I wrote recently, installing eight solar panels on the działka cost 30% more than the ten panels on the house, a 38% increase per panel. For those paying off mortgages, watching interest rates rise (belatedly, it must be said) must be scary.
The old saying 'mend your roof while the sun shines' suggests that capital investment is best done when the economy is weak and inflation is low.
Does paying inflationary prices only encourage more inflation? It works both ways.
You can ask your boss about a pay rise - if you get one, that increase in the firm's employment costs will be passed on the client, and ultimately onto the consumer in the form of increased prices for goods and services. So pay rises only fuel the price spiral.
Behavioural economics is a tough subject, because like quantum physics, it introduces so many random elements into a system as to upset classic theories. Do people in a market behave like a herd? Or do even the slightest variations between individual human behaviours at the interface with the market make it all too difficult to model accurately?
At a time of inflation, the urge is to hoard, to stockpile. Wholesalers, intuiting that they will be able to sell their stock at current price plus 10% if they hang onto to it for a few more months, are filling their warehouses to overflowing, ordering extra stock from the factories, who are running behind with their order books. And so they put more labour onto the job, but labour is lacking, so they pay more for it, thus further fuelling the spiral.
Flour, toilet paper, sugar - favoured staples of hoarders preparing for an inflation apocalypse - should we be buying these in bulk? No. We're doing no one any favours, least alone ourselves.
Italian economist Carlo M. Cipolla, in his classic 1976 work, The Basic Laws of Human Stupidity, set out this grid (below), defining the behaviour of the stupid as those "whose efforts are counterproductive to both their and others' interests". How we behave en masse as a market of economic actors at a time of difficulty will determine how quickly we emerge from the current inflationary crisis.
This time last year:
Midsummer wild food
This time two years ago:
Summer Solstice at a Time of Pandemic
Fashionable bicycles for Warsaw's hipsters
This time ten years ago:
On Jarosław Gowin and leadership in Polish politics
This time 11 years ago:
Death of a Polish pilot
This time 12 years ago:
Doesn't anyone want to recycle my rubbish?
This time 13 years ago:
End of the school year
This time 14 years ago:
Midsummer scenes, Jeziorki
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6 comments:
I have been glad for the last nearly two years I did not need to spent money on refirbrishments, new car, new bikes and could do with what I had purchased in better times, especially the flat bought 4 years ago.
Yes, using less fuel is an important option - cut down on short-distance driving, get on your bike, buy a travelcard - much can be spent in such way. As cooler months draw in, it decreasing temperature indoors to some +18C might be a necessity, not only due to rising gas prices, but also to prevent shortage of energy supply (or let industrial consumers buy more of it).
Prices of construction materials will likely reverse soon. Steel, down by 30% off peak from March 2022 and still plummetting, is hinting at the direction.
There's no use in panic stockpiling or hoarding stuff - this could have been done a few months ago - the boat has been missed. The best one can do is to reduce demand and... wait it out.
@student SGH
Interesting about steel prices falling. We ran an interesting event yesterday with Santander economist Piotr Bielski, who said he'd expect oil price to fall as the global economy starts slowing down. Wage inflation started to soften as well, according to GUS. Having said that, Ludwik Kotecki from the NBP's monetary policy committee expects double-digit inflation to persist in Poland through 2023.
What Santander's chief economist rightly pointed at is that several economic actors will not be capable of withstanding prices which drop them out of business, therefore the market pendulum will be reverting towards the balance.
New of wage growth slower than prices growth is reassuring - employees will be worse off in the short term, but in the mid term, inflation will be more likely to be brought to the heel.
I believe the double-digit inflation might be averted in 2023 if the vicious circle of self-fulfinng prophecy is broken, i.e. if consumers and businesses are credibly persuaded that prices would not continue to rise. In order to achieve this, sacrifices such as not asking for a pay rise have to made.
"the market pendulum will be reverting towards the balance."
An interesting question, whether in inflation (as in growth and employment) there can be 'balance'. 'Targets' certainly, but the word 'balance' suggests a natural level at any given time. Interesting concept!
We are market actors playing two distinct parts - employees and consumers. In both these roles individuals can consider their actions within the concept of 'balance'.
While writing about the pendulum, I had in mind a microeconomic approach to specific markets, especially of commodities whose prices have been artificially inflated by emotions (especially the fear - not the lack of it).
In your interpretation you focus on macroeconomic approach. The entire economies might be in balance or thrown off it temporarily be some external factors, such as negative supply shocks, black swan events, government interventions, etc. I believe the Polish economy is 2021 was away from what I would call balance - unnaturally low interest rates, flow of hollow money into the economy, eye-popping imbalances on several markets, such as construction materials, PPI not converting into CPI (yet then). Currently it also strays away from the balance, which I would define as being on a path of sustainable growth, predictable future prospects, lack of major odds of reaping extraordinary profits or incurring siezable losses.
@student SGH one factor that's been pulling the pendulum away from inflationary pressure is technology - Moore's Law in action in the economy. Apart from the ever-cheaper processing power, free content has had a major effect. In the 1980s, I'd be spending a significant part of my income on newspaper; 35mm photographic film, its developing and printing; music CDs and movies on DVD that I now consume for free or cheaply (YouTube Premium - no more than the cost of a roll of film and D&P for a month's unlimited viewing).
However, in the tangible economy (construction materials as you say), there's no getting away from the constant risk of inflation caused by imbalances in supply and demand.
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