World after 3 years of COVID 19
Will the world economy return to normal in 2022?
If it does not, a painful economic adjustment looms
Will the stagflationary forces acting on the world economy last? Throughout 2021, central banks and most economists have said that the factors causing inflation to rise and growth to slow would be temporary. Supply-chain bottlenecks would subside, energy prices would return to earth and the rich-world workers staying out of the labour force—for reasons nobody fully understands—would return to work. And yet as 2021 draws to a close financial markets, the public and even central bankers themselves are beginning to lose faith.
The dilemma facing policymakers is acute. The textbook answer to inflation caused by supply disruptions is to ignore it and let it go away on its own. Why damage economies with higher interest rates, which will not unblock ports, conjure up new supplies of natural gas or bring the pandemic to an end? In 2011 inflation in Britain rose to 5.2% as a result of rising commodities prices, but the Bank of England kept interest rates low. In the euro area the European Central Bank raised rates, helping send its economy back into recession, and before long found itself with inflation well below its target. Like then, inflation in 2022 driven by high energy prices is likely to subside. (Inflation is the rate of change of prices, meaning that even if prices do not return to previous levels, merely not rising as quickly is enough.)
Comments