What we do–and don’t–know about surging inflation
The evidence of the past year shows that inflation has been far from transitory. But we still believe supply factors and relative demand shifts have been important inflationary forces across the advanced economies, and pressure from these channels will subside from here.
What you will learn:
- Demand factors have played a bigger role than was initially anticipated, especially in the US, and further fiscal loosening could slow the speed that inflation eases. But we remain sceptical that there has been a permanent, significant shift in the inflation generation process that has changed the interaction between fluctuations in demand and prices.
- While we expect inflation to fall back, pressure has grown on central banks to ensure that this happens relatively quickly. Persistent well-above-target inflation has increased the risk that expectations become de-anchored, and that concern has tipped central banks towards erring on the side of doing too much policy tightening.
- Inflation could yet fall back sharply without recessions. But for most advanced economies we think recessions are more likely than not, albeit with relatively small peak to trough GDP falls.
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