Should governments compensate for the rise in commodity prices?
After the COVID crisis and the war in Ukraine, commodity prices will be very high for a long time. In a situation where wage indexation to prices is low in OECD countries, the cost of this rise in commodity prices is borne mainly by households. Governments may then wish to compensate for this price increase through transfer payments to households in order to prevent a decline in household purchasing power. Is this advisable ? Such government aid obviously has the positive effect of preventing a fall in consumption and a recession, while preventing a rise in poverty and inequality; However, if the rise in commodity prices is permanent and not transitory, it seems difficult for governments to commit to permanent compensation for such price rises; Moreover, this compensation eliminates the decline in demand that would limit the cost of the rise in commodity prices; at the very least, it should not eliminate the price signal that triggers savings in raw material consumption.