From transitory to wartime inflation

The inflation trajectory, and the accompanying monetary policy response, is one of the big economic and market uncertainties for the year ahead.  But beyond the near-term issues, the structural environment for inflation and monetary policy is also changing.

Double digit inflation provides a taste of some of the pressures ahead as economic and political regime change continues.  Our 2023 outlook paper noted pressures for an ‘unravelling of the macro policy order’ as the global economy moved onto a wartime footing.  The disinflationary environment of the past few decades is being replaced by new realities.

Transitory inflation

My basic view is that the inflation surge since 2021 was largely due to several post-Covid dynamics: global supply chain frictions; the strength of the rotation of consumer spending from services to goods; the exit of large numbers of workers from the labour force (either temporarily or permanently); as well as aggressive macro stimulus, particularly fiscal policy.

The severity of the supply side shocks, coupled with a strong economic recovery, led to multi-decade highs in inflation across advanced economies.  This inflationary process was strengthened and lengthened by Russia’s invasion of Ukraine: food and energy prices surged, particularly in Europe. 

This note is available at: https://davidskilling.substack.com/p/from-transitory-to-wartime-inflation