New inflation fears, but no paradigm shift

Abstract

▀ Over the past year, it's become easier to envisage a path to sustained higher inflation than it's ever been in the past decade in advanced economies. However, this outcome is far from inevitable ‐ we still think that powerful structural downward forces on inflation remain largely intact. ▀ One factor that could push inflation persistently higher is the potential for an exceptionally large price shock to make second‐round effects for the global economy almost inevitable. But we think this scenario remains a tail risk. ▀ Conversely, the pandemic could have lessened the downward structural forces on inflation. But here again, while the pandemic may have affected the process of inflation generation, we doubt that any changes have been substantial. ▀ Wage pressure could rise as a result of reduced migration, offshoring becoming a less acute risk, and lower participation. But we doubt these trends will persist, whereas other constraints on wages may strengthen, including reduced worker mobility, low public sector wage deals and higher unemployment. ▀ Changes in the monetary‐fiscal policy mix are another potential inflation trigger, particularly if governments provide too much support. But while budget deficits will remain large this year, most economies look more likely to tighten modestly. What's more, concerns that fiscal policy will be too loose typically are contingent on other key assumptions, such as a big unwind of excess savings, which may prove overly optimistic. ▀ Changing demographic trends are another widely cited trigger. However, we expect any upward inflation pressure from this channel would take time to materialise and build only slowly.