men holding on to balloons as they float away into the air

As the global economy reopens and signs of inflation spark concerns about overheating, the underlying reasons for higher prices still suggest inflation will prove transitory, suggests a new report from the Bank for International Settlements (BIS).

With economic output bouncing back as activity restarts, concerns have arisen that the recent era of low inflation may be at an end, the report said.

However, it maintained there’s no cause for alarm just yet as the drivers of recent inflation are likely to prove transitory.

“A closer look at the data reveals that the pickup in inflation can be ascribed largely to base effects, increases in the prices of a small number of pandemic-affected items and higher energy prices,” the report said.

For more durable inflationary forces to arise, there would have to be a material increase in labour costs and “an unmooring of inflation expectations,” the report suggested.

At this point, that doesn’t appear to be the case.

“Wage growth remains contained and the medium-term inflation expectations of professional forecasters and financial markets show little sign of de-anchoring,” the report said.

The belief that recent inflation will prove temporary remains the view of the U.S. Federal Reserve, noted Moody’s Investors Service in a separate report.

When U.S. consumer prices for June came in well above market expectations on July 13, the market largely shrugged it off, Moody’s said, because the data “doesn’t alter the Fed’s narrative that the recent acceleration in inflation is attributable to transitory factors.”

“The reopening of the economy is a one-time event, and that is boosting a number of components of the CPI,” it said.

Still, the risk of persistent higher inflation can’t be entirely dismissed.

“Intensifying supply-side disruptions, especially related to global supply chains, could lead to further price increases,” the BIS report said. At the same time, “post-Covid adjustments, against the background of social tensions, may lead to higher wages or higher fiscal deficits which may in turn put pressure on inflation.”

For now, though, current conditions are consistent with inflation moving toward central bank targets in the medium term, it concluded.