Causes and lessons of accelerating global inflation

Abstract

The world  economy  has recently experienced a strong inflationary shock, which  the leading research  institutions and central banks  were unable to predict. In advanced economies  inflation rates spiked  up to levels  had  not been seen for decades. Inflation also hit emerging  economies albeit the shocks of such magnitude are more common for the countries of this group. What was the reason of the inflationary wave of 2021-2002  and why was it unexpected? In the paper  we propose that the main driver  of inflation was the rapid  recovery  of aggregate demand  while aggregate supply  lagged  behind  since it was negatively affected by quarantine restrictions and  supply  chain  disruptions. A sharp  increase  in the  prices  of food and  energy  contributed to inflation significantly. Unprecedented fiscal  stimulus supported by liquidity injections from central banks  was also an important factor in boosting demand  and  accelerating inflation. Sharp  turn towards ultra­loose monetary and fiscal  policy  can be largely attributed to the  experience of the  previous decade  which  showed  that inflation in advanced economies  remained below the  target level, despite constant stimulus. We discuss  arguments considered by central banks when they kept monetary policy soft even after inflation significantly exceeded  the  target levels. Finally, we briefly  discuss scenarios  of possible  future inflation, including a stagflation scenario, and  analyze  their  underlying factors.