Inflation Scares in an Uncharted Recovery

2021-10-12T14:38:41-04:00October 6, 2021|

By Francesca Caselli and Prachi Mishra

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A key question is what combination of events could cause persistently faster price gains.

The economic recovery has fueled a rapid acceleration in inflation this year for advanced and emerging market economies, driven by firming demand, supply shortages, and rapidly rising commodity prices.

We forecast in our latest World Economic Outlook that higher inflation will likely continue in coming months before returning to pre-pandemic levels by mid-2022, though risks of an acceleration do remain.

Policymakers must walk a fine line between patient support for the recovery and being ready to act quickly.

The good news for policymakers is that long-term inflation expectations are well anchored, but economists still disagree about how enduring the upward pressure for prices will ultimately be.

Some have said government stimulus may push unemployment rates low enough to boost wages and overheat economies, possibly de-anchoring expectations and resulting in a self-fulfilling inflation spiral. Others estimate that pressures will ultimately be transitory as a one-time surge in spending fades.

Inflation dynamics and recovering demand

We examine if headline consumer price index inflation has moved in line with unemployment. Although the pandemic period poses […]