Working Paper: CEPR ID: DP17381
Authors: Jongrim Ha; Ayhan Kose; Franziska Ohnsorge
Abstract: Global inflation has risen sharply from its lows in mid-2020, on rebounding global demand, supply bottlenecks, and soaring food and energy prices, especially since the Russian Federation’s invasion of Ukraine. Markets expect inflation to peak in mid-2022 and then decline, but to remain elevated even after these shocks subside and monetary policies are tightened further. Global growth has been moving in the opposite direction: it has declined sharply since the beginning of the year and, for the remainder of this decade, is expected to remain below the average of the 2010s. In light of these developments, the risk of stagflation—a combination of high inflation and sluggish growth—has risen. The recovery from the stagflation of the 1970s required steep increases in interest rates by major advanced-economy central banks to quell inflation, which triggered a global recession and a string of financial crises in emerging market and developing economies. If current stagflationary pressures intensify, they would likely face severe challenges again because of their less well-anchored inflation expectations, elevated financial vulnerabilities, and weakening growth fundamentals.
Keywords: inflation; growth; COVID-19; global recession; monetary policy; fiscal policy; disinflation
JEL Codes: E31; E32; E52; Q43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| supply shocks (E39) | inflation (E31) |
| accommodative monetary policies (E52) | inflation (E31) |
| inflation (E31) | growth (O40) |
| inflation expectations (E31) | monetary policy responses (E52) |
| tightening monetary policy (E52) | economic instability (E32) |
| inflation (E31) | increased borrowing costs (F65) |
| increased borrowing costs (F65) | reduced growth (O40) |
| financial vulnerabilities (F65) | economic instability (E32) |