The world economic recovery is gaining strength, but it remains unbalanced. Earlier fears of a double dip recession—which we did not share—have not materialized. And, although rising commodity prices conjure the specter of 1970s-style stagflation, they appear unlikely to derail the recovery. However, the unbalanced recovery confronts policy makers with difficult choices. In most advanced economies, output is still far below potential. Low growth implies that unemployment will remain high for many years to come. And the problems in Europe’s periphery are particularly acute. On the other end of the spectrum, emerging market countries must avoid overheating in the face of closing output gaps and higher capital flows. The need for careful design of macroeconomic policies at the national level, and coordination at the global level, may be as important today as they were at the peak of the crisis two years ago.
Of all the things policymakers have had to worry about in the past couple of years, inflation wasn’t one of them. Some even heralded the end of inflation. Today, inflation still isn’t a ‘problem’ in Asia. For the most part, it remains relatively modest, but it is on the rise in some countries in the region. And understanding what is driving that inflation matters. Policymakers need to consider the sources of inflation in choosing policy actions and policy tools. The issue of what drives inflation—or so-called inflation dynamics—is examined in our October 2010 Regional Economic Outlook for the Asia and Pacific region. In this post, Anoop Singh discusses the findings.