Research Briefing | Oct 15, 2021

US | It ain’t stagflation, but it sure is “M.E.S.S.I.”

It ain’t stagflation, but it sure is “M.E.S.S.I.” - iPad

It’s not runaway inflation, and it’s certainly not stagflation. In fact, the US economy is going through a bout of “M.E.S.S.I.” inflation dynamics – Moderating Expansion with Sticky Supply-driven Inflation – a rare phenomenon where strong, but cooling demand is met by constrained, but accelerating supply, leading to transitory, yet sticky inflation.

What you will learn:

  • Our latest assessment points to still-healthy inflation dynamics where inflation and demand are negatively correlated, and wage growth reflects a re-leveling of low wages rather than the onset of a spiraling price-wage inflation loop.
  • We estimate the risk of a structural shift from the current low inflation regime to a high inflation regime (i.e., persistently above 5%) is currently around 20%. But in our view the factors that led to previous regime shifts are not present now.
  • While it’s naïve to think the Fed can unclog ports, boost semiconductor output, or free labor supply, more hawkish monetary policy guidance will lead to tighter financial conditions, constraining demand growth as the fiscal impulse diminishes and supply growth accelerates. This should ensure inflation cools.

Back to Resource Hub

Related Services

Post

Why an ageing population doesn’t mean soaring inflation

What’s the future for inflation? Joachim Nagel, the new president of Germany's central bank, believes the rapidly ageing global population will play a key role – ramping up pressure on prices in the medium term. While we agree slowing labour supply will stifle output growth, in his recent discussion Nagel failed to fully consider the demand side of the argument.

Find Out More

Post

Surging global food prices could drive eurozone core inflation higher

Along with energy prices, global food prices have emerged as a key driver of the eurozone's current inflationary surge. Like other advanced economies, eurozone countries tend to be less exposed to global food price fluctuations. But if persistent and combined with strong demand, high food prices could result in a higher pass-through to core inflation.

Find Out More