Although there has been much debate about what this stimulus means for inflation, our forecasts have only risen modestly. Inflation prints will almost inevitably step up during the course of this year as a consequence of a return towards normality and the possibility of pent-up demand meeting supply bottlenecks as COVID related restrictions gradually become relaxed. However, any rise should be limited.
There is still a great deal of spare capacity in the global economy. Unemployment continues to be above long-run averages, keeping a lid on wage growth and the vast build-up of both private and public debt in the face of the pandemic will likely weigh on economic expansion as balance sheets are repaired. In addition to this, the same secular forces that have driven a decline in trend inflation over the past forty years, such as globalization, the weakened bargaining power of labor in deindustrialized, service-dominated economies and technology-driven competition, are still very much in place. So, although we have increased our inflation forecasts, including that of the US, we continue to emphasize that our inflation forecasts remain modest.
Average G7 Inflation
Average G7 Unemployment Rate
- Large policy stimulus (particularly in the US) means inflation risk has become a talking point. However, the risk of sustained acceleration in inflation is low in our view
- According to our forecasts, inflation will rise modestly this year as the economy recovers, perhaps exacerbated by temporary supply dislocations
- Structural changes in advanced economies over the last 40 years have led to a secular decline in inflation (chart 1)
- These factors continue to be relevant: globalization, deindustrialization, deunionization and reduced labor bargaining power, deregulation and technology
- Cyclical factors also likely to weigh on inflation, such as unemployment, which is above recent non-inflationary lows (chart 2)
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