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Conclusion of Phillips Curve

If the economy is operating below full capacity, a significant increase in aggregate demand is likely to cause a reduction in unemployment and higher inflation. Most economists would agree that in the short term, there can be a trade-off between unemployment and inflation. However, there is a disagreement whether this policy is valid for the long-term. Monetarists would tend to argue the trade-off will prove short-term, and we will just get inflation. Monetarists place greater stress on the supply side of the economy.

However, Keynesians argue that demand deficient unemployment could persist in the long-term. If there is a significant negative output gap, boosting AD could lead to lower unemployment and a modest increase in inflation. In a deep recession, this fall in unemployment will not just be temporary because there will be no crowding out. In an ideal wopolicymakersakers will aim for low inflation and low unemployment. To achieve this, we need economic growth that is sustainable (close to long-run trend rate) and supply-side policies to reduce cost-push inflation and structural unemployment. If these criteria are met then it becomes easier to achieve this goal of lower inflation and lower unemployment.

In the current economic climate, many Central Banks and policymakers are weighing up how much importance they should give to reducing unemployment and inflation. For example, the Federal Reserve is considering using monetary policy to achieve an unemployment target and a willingness to accept higher inflation. This willingness to consider a higher inflation rate, suggest policy makers feel that the tradeoff of higher inflation is worth the benefit of lower unemployment. However, not all economists agree we should be allowing the inflation target to increase. If we allow inflation to increase, inflationary pressures will become engrained, and monetary policy will lose credibility. The ECB would be unwilling to tolerate higher inflation – even as a measure to reduce unemployment in Europe.

4.Inflation and defilation in current pandemic situation

The Covid-19 pandemic has led to an enormous slump in economic activity worldwide. At the same time, fortunately, governments and central banks have implemented economic stimulus measures unprecedented in economic history. With such a combination of massive shock and very highly dosed therapy, the question increasingly arises as to whether this will result in inflationary or deflationary trends for the global economy in the medium term.¹⁰

The coronavirus crisis proved a simultaneous supply and demand shock. International supply chains were disrupted. Many workers had to look after their children due to the closure of kindergartens and schools. In some countries, economic activities were suspended almost completely. On the demand side, the lockdown at this stage meant consumers were no longer able to demand certain services (‘social consumption’). Travel and all related services came almost to a standstill.

The ‘new normal’ which has now emerged in Europe is anything but normal. Supply-side constraints are losing their importance, although the sustained need for distancing continues to have a negative impact on productivity in both industry and services. On the demand side there remains a strict ban on large-scale gatherings (concerts, congresses, sporting events). Rising unemployment is also having a negative impact on overall economic demand, as is the short-time work  practiced particularly in Germany (and Austria), which is also leading to a decline in net incomes.

In addition to these direct effects, overall economic demand is likely to suffer from the great uncertainty about the progress of the pandemic, especially the danger of a ‘second wave’. This will lead to postponement of corporate investments, as of the purchase of cars or other longer-term consumer goods by households. The phase of ‘true normal’ will only be reached when it is possible to find a vaccine against the coronavirus and/or an effective therapy for its victims. With the return to a normal social life, the restrictions on supply should lose much of their significance. Demand is however likely to continue to suffer from the many job losses, while with many corporate balance sheets massively damaged by the crisis, the scope for financing investments will remain severely restricted.

On the whole, there is a greater risk that the pandemic will lead to deflation in the global economy. Experience gained since March 2020 may lead to a fundamental change in our attitudes towards mobility. Intensive use of the home as office will lead to a reduction in trips to work and lower demand for cars and office space. Travel to workshops and conferences will be significantly reduced, to the detriment of airlines, hotels and restaurants. As a result, energy prices will remain permanently low as demand for oil declines. The deflationary effects will be all the more noticeable to the extent that it is impossible in phase II to avoid a rise in unemployment and a widespread wave of insolvencies. For large economies such as the US, Japan and Germany, this is much easier to achieve than for smaller and sometimes highly indebted cases such as Italy, Greece or Spain.

Global economy heads for deepest recession since Great Depression as business comes to near standstill. Inflation in the wealthiest countries has collapsed at the fastest pace since the financial crisis, as the coronavirus outbreak sinks the world into the deepest recession for almost a century. The Organization for Economic Cooperation and Development (OECD) said annual growth in the price of goods and services across the group of 37 advanced countries slowed significantly in March as Covid-19 brought business and social activity to a near standstill. In a reflection of evaporating demand from consumers and businesses as governments impose tough lockdown measures to limit the spread of the virus, inflation across the OECD area dropped to 1.7% in March from 2.3% in February, the largest deceleration since the 2008 financial crisis. Against a backdrop of falling global oil prices amid a price war between Saudi Arabia and Russia and as the world economy heads for the deepest recession since the Great Depression, the Paris-based group said energy prices fell by 3.6% in March, in a dramatic swing from a 2.3% increase in February. Food price inflation meanwhile increased to 2.4% in March, from 2% a month earlier. Concerns are mounting that the global recession triggered by the coronavirus pandemic could lead to a damaging deflationary spiral. Deflation is when the price of goods and services falls for a sustained period. Consumers may put off purchases in anticipation of cheaper prices in future. However, companies may cut wages to cope with lowering their prices, fueling a vicious cycle. Janet Henry, the global chief economist at HSBC, said she expected inflation in the US, euro zone and most of the G10 group of wealthy countries to turn negative within the next couple of months. “Inflation is heading even lower, dragged down by the latest oil price collapse.” She warned that inflation could soar if governments and central banks overestimated the damage to global supply chains caused by the pandemic, and offered too much support to businesses and households to keep spending. However, should Covid-19 cripple the economy worse than expected, “extra slack in the economy from a failure to stimulate demand sufficiently could ultimately result in below-target inflation or even outright deflation”, she added. Falling demand for clothes as shoppers stayed away from the high street in March prompted a drop in UK inflation to 1.5% in March from 1.7% in February. Economists expect inflation in Britain to fall further as the tumbling global oil price pushes down the cost of petrol. Research from the Office for National Statistics had shown the price of some high-demand goods, such as long-life food, sanitary products and pet food, had risen sharply in recent weeks as consumers scrambled to stockpile them. However, the government statistics body later said it had made data collection errors, and that prices had not risen as much as previously thought. The Bank of England, which will set out forecasts for inflation and the broader economy on Thursday, has a target set by the Treasury to steer inflation towards 2%. According to the OECD, annual inflation also fell sharply in Canada, to 0.9% in March, from 2.2% in February, while there were also steep declines in the US, France, Germany and Italy.¹¹

Conclusion

There are many global problems in the world, and undoubtedly inflation can be attributed to them, since this "plague" has affected almost all economies the world. But if you can curb it, then it can be considered as an instrument of their economic policy. It is sometimes argued that inflation is inherent not only minuses, but also pluses, on the grounds that an open inflation, giving rise to a continuous rise in prices, stimulates recovery in commodity markets, increased business activity, expansion of production and employment, growth in demand for shares. Fighting inflation and developing a special anti-inflationary program is a necessary element

of economic stabilization. Such a program should be based on the analysis of causes and factors, defining inflation, a set of economic policy measures, helping to eliminate or reduce inflation to reasonable limits.

Deflation is really different: sometimes good, but more often it is bad. A good one is when companies reduce costs, including administrative costs, increase efficiency, increase competitiveness, and manufacturers are ready, without reducing output and jobs, to lower prices for their products in the struggle for markets and buyers' attention. But, as a rule, a decrease in the prices of goods occurs due to a drop in aggregate consumer demand, a decrease in the amount of money in circulation and an increase in its real value, which reduces the income of producers, forces them to cut production and lay off workers or reduce their wages. And then it is bad deflation, and its occurrence is an unmistakable indicator of an incipient recession. If, however, a policy of austerity is added to the process of lowering prices for goods, depriving enterprises of government orders and citizens of additional social support, and at the same time a credit crunch or deleveraging begins, when companies massively refuse investments and strive to repay loans as soon as possible, in order to reduce the debt burden on business, and banks reduce lending due to high risks, then in this case the so-called deflationary spiral begins to unfold in the economy, household income and consumer demand continue to go down with a simultaneous increase in unemployment, which only increases economic and social problems.