Wolf on Stagflation

 Are we moving into a new era of higher inflation and weak growth, similar to the stagflation of the 1970s. 

If so, what might this mean?

The US and other high-income economies experienced almost a decade of high inflation, unstable growth and weak stock markets. 

Excess demand causes supply shocks to turn into sustained inflation, as people struggle to maintain their real incomes and central banks seek to sustain real demand. 

This then leads to stagflation, as people lose their faith in stable and low inflation and central banks lack the courage needed to restore it.

At present, markets do not expect any such outcome. 

The growth of nominal demand is vastly higher than interest rates.

 Inflation will fall, but maybe only to 4 per cent or so. Higher inflation would become a new normal. The Fed would then need to act again or have to abandon its target, destabilising expectations and losing credibility. 

If the 1970s taught us anything, it is that the time to throttle an inflationary upsurge is at its beginning, when expectations are still on the policymakers’ side. 

Martin Wolf FT 24 May 2022

https://www.ft.com/content/734cb1ff-9dc1-4a67-a567-c2f681f18a77