The rich world has not seen a wage-price spiral since the 1970s. Is there risk of this happening in 2022?
stagflationary forces acting on the world economy last? Throughout 2021, central banks and most economists have said that the factors causing inflation to rise and growth to slow would be temporary. Supply-chain bottlenecks would subside, energy prices would return to earth and the rich-world workers staying out of the labour force—for reasons nobody fully understands—would return to work.
The dilemma facing policymakers is acute. The textbook answer to inflation caused by supply disruptions is to ignore it and let it go away on its own. Why damage economies with higher interest rates, which will not unblock ports, conjure up new supplies of natural gas or bring the pandemic to an end? In 2011 inflation in Britain rose to 5.2% as a result of rising commodities prices, but the Bank of England kept interest rates low.
Yet the comparison with the early 2010s is inexact. The woes of global trade in 2021 have not just been caused by disrupted supply, such as covid-19 outbreaks shutting Vietnamese factories. There has also been excess demand. Massive fiscal and monetary stimulus, combined with social distancing, led consumers to binge on goods, from games consoles to tennis shoes. In the summer of 2021 Americans’ spending on physical stuff was 7% above the pre-pandemic trend.
Some monetary policymakers are beginning to fear the reverse: wage growth that continues to rise as workers come to expect higher inflation. The rich world has not seen a wage-price spiral since the 1970s, and doves argue that in economies without widespread unionisation, workers are unlikely to negotiate higher wages. But if rising inflation expectations do prove self-fulfilling, central banks’ job would suddenly get much harder.
Above all else, the pandemic is not over. The spread of the virus could yet disrupt economies once again if immunity wanes and new variants can evade vaccines. But with supply chains at their limits, the world cannot repeat the trick of maintaining economic growth using stimulus that shifts consumer spending towards goods.
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