Macroscope | Global inflation crisis looms because central banks let economies ‘run hot’

Name: Millions of Sri Lankans go hungry as food prices soar
Uploaded: 2022-08-28T16:30:10.000Z
Duration: 2 min 18 s
Description: Millions of Sri Lankans go hungry as food prices soar

Contrary to the hopes of policymakers and pundits, the global surge in inflation could be about to get worse instead of returning to normal

Countries that are ‘running their economies hot’ to maintain output and employment are instead fuelling a potential global economic disaster

Reading Time:3 minutes

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A customer pays in cash at a vegetables stall at a street market in Sao Paulo, Brazil, on August 25. Shocks to the global system resulting from pandemic-induced supply interruptions followed by the Ukraine war could persist for years rather than months. Photo: AFP

Anthony Rowley

Published: 12:30am, 29 Aug 2022

Almost everyone knows by now that inflation has reached scary levels, and fewer people are prepared to dismiss the phenomenon as “transitory”. But what if the nightmare is only beginning and inflation could go far higher before draconian policy actions rein it in?

Research presented to the Jackson Hole annual meeting of central bankers in Wyoming at the weekend suggests this could be the case. It has grim implications for financial markets, debt burdens, future unemployment rates and, of course, soaring price levels.

Some still take comfort in the notion that as the Covid-19 pandemic subsides and global supply chains return to “normal”, inflation will fall below double-digit levels and subside along with interest rates. The war in Ukraine will end and all will be well.

Things were never going to be that easy. Such cosy notions do not square with the reality of a world at war – not in the form of a hot war but of economic confrontations between the United States, Russia and China with the resulting conflagration in energy, commodity and food prices.

Shocks to the global system resulting from pandemic-induced supply interruptions followed by the Ukraine war could persist for years rather than months. What were assumed to be one-off shocks to prices and interest rates now look to be more structural than episodic.

02:18

Millions of Sri Lankans go hungry as food prices soar

What is emerging is that key central banks have let the inflation genie out of the bottle by their decisions to allow their economies to “run hot”, aided by fiscal stimulus. Getting it back into the bottle could prove painful for us all.

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.css-1m2rp1p{color:#34b8b5;}Macroscope | Global inflation crisis looms because central banks let economies ‘run hot’

Macroscope | Global inflation crisis looms because central banks let economies ‘run hot’