Global Economy Watch: Is High Inflation Back for Good?

High levels of inflation in most advanced economies (AEs) is starting to make some policymakers, households and some of our clients nervous. The real question is whether this is temporary or something that will last longer? To answer this question, this edition of Global Economy Watch disentangles the inflation dynamics we see in AEs and analyses the arithmetic, demand and supply side drivers.

The arithmetic driver tells us that some of the increase in the inflation rate in the first half of the year is due to ‘base effects’. Shutting down and reopening segments of the economy has led to erratic price changes. These have led to statistical oddities which will gradually fade.

On the demand side, even though the  rebound has been strong in the G7 (the Group of Seven is an inter-governmental political forum consisting of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States), most are  still operating with a significant degree of  slack or an output gap. The International Monetary Fund (IMF) estimates that this will persist for a few years for all of  the G7 except the United States (US). However, the  employment data suggests that even the US  labour market is operating with significant  slack. On balance, we think that the risk of  demand-pull inflation is low.

Via PwC

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