Written by Henry Carr: Economics Editor, The Economist
Will the forces of stagflation affecting the global economy continue? Throughout 2021, many central bankers and economists have said that the forces causing higher inflation and slower growth will be temporary. Supply chain bottlenecks will be resolved, energy prices will return to normal, and the rich world's workers who have been removed from the workforce will return to work, although no one fully understands why. Probably. However, as 2021 draws to a close for financial markets, not only the public but even central bankers themselves are beginning to lose confidence.
The dilemma facing policymakers is serious. The textbook answer to inflation caused by supply disruptions is to ignore it and let it disappear on its own. Why damage the economy with rising interest rates that don't lift port blockades, call in new supplies of natural gas, or end the pandemic?In 2011, rising commodity prices caused the UK inflation rose to 5.2%, but the Bank of England kept interest rates low. In the euro zone, the European Central Bank raised interest rates, pushing the economy back into recession, but eventually causing inflation to fall well below target. Just as it did then, inflation due to soaring energy prices is likely to subside in 2022. (Inflation is the rate of change in prices, meaning that even if prices don't return to their previous levels, it's enough that they don't rise as quickly.)
