Stagflation Ahead?

As price growth accelerates, central bankers are coming under increasing pressure to tighten monetary policy. But will they succeed in keeping inflationary expectations anchored without choking off the faltering global economic recovery or triggering debt crises – especially in emerging economies?

In this Big Picture, Harvard University’s Kenneth Rogoff highlights several worrying parallels with the 1970s, and argues that a sustained period of high inflation may have become much more likely. And over the medium term, warns Nouriel Roubini, a variety of persistent negative supply shocks could turn today’s mild stagflation into a severe case.

Mohamed A. El-Erian therefore calls for a timely and comprehensive policy response, including moves by the US Federal Reserve to begin unwinding its ultra-loose monetary policies. But the Hoover Institution’s John H. Cochrane questions whether today’s Fed would, if necessary, reapply the harsh high-interest-rate policies of the 1980s to contain inflation.

But policymakers in vulnerable economies should bet on that, cautions Columbia University’s Shang-Jin Wei, who urges them to start implementing self-help measures now in case US interest rates rise faster and sooner than most forecasts currently predict. As Piroska Nagy-Mohacsi of the London School of Economics noted in August 2020, emerging-market central banks can use quantitative easing in responding to the COVID-19 crisis only for as long as advanced economies’ monetary policies remain sufficiently expansionary.

But Robert Skidelsky urges European and US policymakers to wean themselves off their decade-long addiction to QE, which he argues has fueled financial instability while having little effect on the general price level.