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In this article, Tobias Baer raises a red flag on inflation drivers and where and why they could escalate.

My colleagues already have observed 20 years ago that I am a worry wart. So some of you won’t be surprised that I have been worrying about inflation for more than a year now. But the surprise goes both ways – I am increasingly puzzled that nobody, not even The Economist and The Wall Street Journal, seems to discuss two major seminal trends that could increase inflation for years to come. Could the focus on short-term supply chain issues, the war in Ukraine and recent spikes in energy and grain prices have deflected attention from two much more fundamental changes to our economies?

The two effects I am most worried about are the growing cost of regulation and structural underinvestment in capacity due to growing investment risks. Regulation has, in fact, two aspects – it causes first-order effects in terms of incremental operational and hence variable cost, and it has second-order effects if it reduces capital investments (blending into other factors discouraging investment). And for both there is ample evidence.

Of course, climate-related regulation such as the need for carbon certificates and clean energy mandates will impose huge costs for years to come in order to stem global warming. However, this is by far not the only area where new regulations affect the cost of running a business.

Regulation has become an industry of its own – countless bureaucrats in Washington, Brussels and elsewhere are constantly tasked with churning out new regulations – e.g., to protect consumers, workers, and the environment, let alone the profits of specific lobbyists. If your job in Brussels is to protect consumers by writing new rules and requirements, you obviously never will get yourself unemployed by declaring that the optimum number of regulations has been reached and no more rules are needed – instead, you’ll make a living by always finding a new defendable regulation to add to the pile. I mean, who would want to go back to the gruesome times when the temperature of staff bathrooms of German pharmacies was not regulated to the degree centigrade? Yet – how on earth can anyone think that all this regulation does not translate into higher cost that in the end somehow will trickle through to consumers?

When I last visited Germany a few months ago, I overheard a news item that exemplifies the problem: due to new environmental regulations in Germany, the required manpower for replacing a residential building’s heating system has risen from 2 to 10 man-days. That by itself is a whopping increase of 400% of the required labor input, and I don’t want to ask what effect the resulting labor shortage – good luck getting any work on your heating done before 2023! – will have on the hourly rate charged.

Key points include:

• Growing shortage in commodities
• Ever-stricter environmental regulations
• Falling capital investments

Read the full article, The Two Long-Term Inflation Drivers Nobody Talks About, on LinkedIn.