EcoTV Week

Inflation: a cycle in three phases

02/04/2022

Over the past two years, the world economy has suddenly moved from too little to too much inflation.

Transcript

Over the past two years, the world economy has suddenly moved from too little to too much inflation. Three phases can be distinguished. The first phase concerns the inflation impulse, which was driven by four factors: an increase in demand, a reallocation of demand, supply bottlenecks and a shift in the sector preferences of the labour force. These factors caused important changes in relative prices as well as a jump in inflation. In phase two, second-round effects enter into force. Wage growth increases and elevated inflation becomes broad-based. Key conditioning factors are negotiation power of the labour force and pricing power of companies. Both depend on the growth environment. In phase three, ‘natural’ forces such as slower growth can weigh on inflation but the prominent role is taken by central banks. They prefer to tread carefully, seeking to avoid premature or excessive tightening. Their task is complicated because at the current juncture inflation is to a considerable degree caused by a shock in energy prices. More than anything, they hold the key for the future development of inflation.   

THE ECONOMISTS WHO PARTICIPATED IN THIS ARTICLE