The past couple of years have been difficult to say the least. The Covid-19 pandemic has thrown the world into disarray, sparing no country. And just as it seemed it might be safe to come out and play, we are faced with uncertainty of another beast, the Omicron variant.

Marketwatch is neither a scientist nor a health expert so he does not propose to speculate about what the future holds. But he does want to talk about another beast which is making life equally uncertain. And that beast is inflation.

As the world emerged from a range of lockdowns, it was inevitable that there would be an increase in overall demand for goods and services which had been effectively shut down in many places. Don’t worry cried a lot of experts, its only temporary. Demand and supply will quickly balance and everything will return to normal. The loudest voice came from the Federal Reserve Bank in the US, describing the issue as “transitory”, so they must have been right.

That was many months ago and that change hasn’t occurred yet. In fact, in some cases it has got worse. So let’s have a look at some of the key issues.

As we emerged from our slumber, we needed to start doing things like driving the children to school, driving to work and generally getting out and about. Demand for fuel rose worldwide. This increase in demand, however, was not matched by the willingness of oil-producing countries to pump more oil.

It is a long-held principle that, when demand exceeds supply, prices rise. This particularly applies to things like fuel which has a wide consumption base. Consumers really need this product so are prepared to pay more. At the moment, we are seeing significantly higher fuel prices which contribute to inflation.

And then we have the supply chain crisis. During lockdowns, households have actually saved some pretty decent sums of money. They are expected to celebrated their freedom by having a bit of a spend up. In fact, economic forecasts of growth in countries such as ours, contain a key assumption that this will happen. As we have said before, consumer spending accounts for a large part of our economy so this is seen as an essential part of the growth strategy.

Now there are a couple of obstacles to this.

The first is that manufacturing around the world has not yet ramped up to match demand. And the second is that the ability to ship goods is constrained by the fact that the pandemic disrupted transport networks. One example of this is that shipping containers aren’t in the right place in the world to match with the location of ships and products. Shortage of products is evidenced by empty shelves. In some cases, alternatives which are higher priced, are being offered. The disruptions underscore how several forces are coming together to squeeze the world’s supply chains, from the pandemic-driven rise in consumer demand for tech goods to a backlog of imports at clogged ports. They are creating cost increases and delays for numerous industries, company executives and analysts say, affecting profit margins and the prices that companies and consumers ultimately pay for many goods.

Now, many companies are considering changing the model to avoid future product shortages and transportation delays, even if it might increase costs. Some are looking at moving production closer to home. Others are considering spreading small factories around the world instead of putting all their manufacturing in one place.

There is little evidence of a big shift so far, given the costs and the uncertainty. But surveys and interviews with corporate executives show some have started to make changes and many are seriously considering them, though consultants say the moves could take several years to roll out.

Their decisions could ripple through the global economy, fuelling growth in some places while curbing it in others. Prices for consumer goods could rise, as companies source from more expensive places. Higher inflation and interest rates could follow.

And, perversely, there is a labour shortage, not just here, but everywhere. It sounds weird, because you would think that if we had the labour before the pandemic, shouldn’t we have it now?

There are many different reasons for why we don’t. For example, in Australia there are some 300,000 fewer foreign students than before. Filling that casual labour pool is not easy. Business owners in tourism and hospitality are facing huge difficulties attracting staff. But they have also been jolted by the demands of existing staff who are threatening to leave without extra pay or better conditions – or both.

In the US the scarcity of workers post–COVID has been dubbed the “great resignation”. There, workers are leaving their jobs at unprecedented rates, with many deciding to look for a sea change.

Many theories about this phenomenon have been written over the past month. Some say that the unprecedented level of government support during the pandemic has provided a small nest egg for workers allowing them to remain out of the workforce.

Others suggest a change in work patterns and working from home has led to the realisation that there is more to work than the daily grind. But just as plausible is that workers are holding out for better wages conditions – and that reflects what we are seeing in Australia.

It is certainly no accident that Jeff Bezos has just increased the hourly pay rate for new workers at Amazon by $US3 to $US18 and offered special bonuses in locations where staff shortages were particularly acute.

The power pendulum has clearly swung post-pandemic from employers towards employees – a recipe for wage inflation. And the Reserve Bank called out last week that wages growth could pick up to its highest pace in years as the economy recovers from the COVID era and the labour market tightens.

Businesses, particularly those hit hard by COVID, won’t appreciate any additional costs from higher wages. That said, business owners have been the beneficiaries of stubbornly low wage growth for years. At the same time inflation has been at all-time lows but wage increase will feed through to inflation which will be on the rise.

Initially, as we said at the beginning, the general opinion was that all this was transitory and that the inflation bogey would recede. But it is not now looking like that. Wage inflation, for example, can be a good thing as it stimulates spending. Providing inflation is maintained at a relatively benign level of say 2% the results can be beneficial. Certainly, in Australia we are not currently seeing the levels being experienced in areas like the US and Europe. The “transitory” voices are now more muted, and the Federal Reserve has stopped using the word and is now open to the possibility of interest rate rises which is the standard inflation-control response.

Taking that approach will mean, among other consequences, higher mortgage interest rates. That scenario is worrying the Reserve Bank because of levels of household indebtedness.

We are not there yet, and may never be. But the risks are there. These next few months, with the added uncertainty of the direction of the pandemic, are going to be interesting.

So all the more reason to look forward to the festive season. Marketwatch wants to thank you all for sticking with his eclectic collection of articles and wishes you and your families all the best for an enjoyable and happy Christmas. And, as is the tradition for him and his dear spouse on Christmas Day, it would not be complete without a glass or two of Seppelts Sparkling Shiraz, chilled but not overdone. See you in 2022.