High Inflation Is Never Good, But Markets Have Been Overreacting

Chief Economist Eugenio J. Alemán discusses current economic conditions.

The impact of high inflation on individuals’ finances is not something to take lightly, especially in the U.S., because for almost 40 years we have had no experience with such an event and have no clue how to deal with it or how to try to minimize its negative impact. In other countries that is not the case, as low inflation has not been part of their experience, and in some of them, people have become accustomed to dealing with high inflation.

For companies, high inflation is not good for business, even if politicians always use firms’ price increases as scapegoats for their failure to help keep price increases contained. It is true that, in the short term, some firms may benefit more than others from higher-than-expected inflation, especially as inflation accelerates. However, if firms misprice their goods as inflation comes down, which has been the case for the last year and a half, they could lose market share, something that markets will punish severely.

Of course, each industry is different and competitive pressures, or the lack of them, could temporarily benefit those that try to keep prices higher in a disinflationary environment. And in this vein, what we are seeing from the political system is frightening: an increase in protectionist measures such as higher tariffs on imported goods, etc., that are bound to help firms keep prices higher than they would otherwise be if trade was freer.