Will a post-pandemic surge in demand fuel inflation?

Demand was always likely to rebound strongly as economies re-opened and confidence returned. Beyond this, though, there are reasons to think that we could now be in for a period of sustained strong aggregate demand in developed economies. Initially, this will be soaked up by spare capacity. But demand might stay strong even once economies return to full employment, potentially fueling inflation. This risk looks highest in countries which have seen the biggest policy stimulus and the smallest amount of pandemic-related economic damage, with the US most obviously fitting the bill.
Vicky Redwood Senior Economic Adviser
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CE Spotlight

Are the structural headwinds to inflation fading?

The past few decades have been marked by a combination of sustained disinflationary forces, but the picture in more recent years, and particularly since the pandemic, looks more mixed. Globalisation and the latest wave of technological progress are putting less downward pressure on prices than in previous decades, but at the same time, weak union power and the continued trend towards flexible labour markets mean the risks of wage-price spirals still look low. The key threat in our view is whether policymakers’ commitment to low inflation has begun to weaken, with those risks greatest in the US.

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CE Spotlight

What has driven periods of higher inflation in the past?

When contemplating whether we are entering a new era of higher inflation, it makes sense to first reflect upon the lessons from history. While there are several insights that apply to the current debate, a unifying theme is that sustained high inflation is not simply ‘always and everywhere a monetary phenomenon’ – labour and product market institutions determine the extent to which price pressures translate into actual inflation, and where inflation settles in the medium term is ultimately the decision of policymakers.

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CE Spotlight

How long will pandemic price pressures last?

Global supply problems could put some further upward pressure on inflation in the near term, but the increase in inflation experienced in the immediate wake of the COVID crisis is close to peaking and we expect headline inflation to fall back in every major advanced economy in 2022. Underlying price pressures are likely to remain muted in Europe and Japan throughout this year and next. However, a combination of large amounts of fiscal and monetary support, and a longer-lasting drop in the labour force, means that core inflation in the US will remain well above target in 2022.

10 September 2021

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The difficulties of capturing productivity improvements

Recent methodological changes by the UK statistics body highlight the difficulties of capturing productivity improvements in official economic data. Although the revisions will make only a small improvement to the UK’s productivity picture, they support our optimism that there are productivity gains yet to be measured or realised from the technological developments of recent years.

14 July 2021

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Global migration to bounce back

Global migration has ground to a halt over the past year or so, but we doubt that the pandemic will have any major lasting impact. Moreover, there is potential for migration to get a fresh impetus from a big rise in the number of people leaving Africa over the coming decades. This could help to mitigate the problem of ageing populations in developed markets, although countries will continue to display varying degrees of openness to immigration.

15 June 2021

Global Economics Update

How concerning is the recent rise in inflation?

A rise in inflation was always likely to happen this year as economies re-opened and energy prices recovered from last year’s sharp falls. But in the US in particular, the increase since the start of the year has exceeded even our relatively strong expectations. While this might primarily reflect transitory factors, we continue to think that the risk of a sustained rise in inflation is bigger in the US than in other developed economies.

10 June 2021
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