Top economists give clues on what's next for global inflation
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Illustration: Brendan Lynch/Axios
To understand what it will take to achieve the "last mile" of bringing inflation down to normal, you need to understand why it shot up so quickly in the first place.
Why it matters: Two of the leading economic policy minds of the last generation have sought to do just that in a new paper, unpacking why global inflation took off in the early 2020s — with results that suggest this inflationary episode can end with less pain for workers than in the 1970s and '80s.
- Ben Bernanke and Olivier Blanchard, in a paper out Thursday morning, find that the global inflation shock started with pandemic-snarled supply chains and was exacerbated by the Russia-Ukraine war. Tight labor markets and rising wages were not a primary cause.
- Still, they find that some countries — but not necessarily the U.S. — will need to see some weakening in labor markets to fully quash inflation.
State of play: Last year, Bernanke, the former Fed chair, and Blanchard, the former IMF chief economist, examined the sources of price pressures in the U.S.
- Subsequently, 10 other central banks — including those in Europe, Japan and Canada — wanted a similar dissection of their respective inflation shocks.
- Bernanke and Blanchard say such a project is "unprecedented" (at least as far as they know).
The intrigue: The authors say as the initial sources of price shocks disappear, a different source is becoming a bigger inflationary driver in many (though not all) nations: tight labor markets.
- "Labor markets became tight almost everywhere but played almost no role in the inflation takeoff," Bernanke and Blanchard write.
- "However, the inflation effects of tight labor markets are persistent, so that, as the shocks to prices (e.g., for energy and food) have reversed, the wage pressures from hot labor markets have become a more important source of inflation," they add.
The big picture: In the nations examined — except Germany, Japan and Belgium — demand for workers still notably exceeded the supply of them relative to before the pandemic. Labor market cooling might be required to vanquish inflation entirely.
- "[W]age inflation has become the larger factor behind the remaining price inflation, which may make further reductions in inflation more difficult to achieve," the authors write.
- Encouragingly, they say, there is very little evidence of a wage-price spiral, a phenomenon that made inflation particularly difficult to stamp out in the '70s.
The bottom line: Bernanke and Blanchard note that "the unemployment costs of the last mile could be limited" in the U.S. as job market dynamics normalize in such a way that suggests demand could come down without a huge spike in joblessness.
