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Will Deglobalization Fuel Inflation?

Some economists argue that the pandemic-driven retreat from globalization, together with population aging in China and the advanced economies, is a recipe for inflation. But while workers' bargaining power may rise, a wage-price spiral in the advanced economies is unlikely.

MUNICH – Inflation seems to be on everyone’s mind nowadays. The debate usually centers on whether America’s massive monetary and fiscal stimulus will de-anchor inflation expectations and cause prices to spin out of control. But there is another trend that could also generate inflationary pressure: deglobalization.

Deglobalization has been occurring since the 2008 global financial crisis. But the coronavirus pandemic has accelerated the trend significantly. Using data from the financial crisis, Kemal Kilic and I predict that the COVID-19 shock is likely to lead to a 35% decline in cross-border value chains – the main factor driving globalization over the last three decades.

A recent survey by the Munich-based ifo Institute supports this conclusion. The study showed that about 19% of German manufacturing firms plan to reshore production. Of these, 12% will begin acquiring inputs from German suppliers, and 7% will produce them in-house.