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Don’t Bet on a Soft Landing

With “Team Persistent” having clearly prevailed over “Team Transitory” in the debate over the nature of today’s surging inflation, the question now is whether prices can be tamed without also causing a recession. The historical evidence suggests not, leaving central banks to choose between bad and worse options.

NEW YORK – In 2021, the big debate about the outlook for the global economy focused on whether the rising inflation in the United States and other advanced economies was transitory or persistent. Key central banks and most Wall Street researchers were on “Team Transitory.” They attributed the problem to base effects and temporary supply bottlenecks, implying that the high inflation rate would rapidly fall back to central banks’ 2% target range.

Meanwhile, “Team Persistent” – led by Lawrence H. Summers of Harvard University, Mohamed A. El-Erian of Queens’ College at the University of Cambridge, and other economists – argued that inflation would remain high, because the economy was overheating from excessive aggregate demand. That demand was driven by three forces: persistently loose monetary policies, excessively stimulative fiscal policies, and a rapid accumulation of household savings during the pandemic, which led to pent-up demand once economies reopened.

I, too, was on Team Persistent. But I argued that, in addition to excessive aggregate demand, several negative aggregate supply shocks were contributing to rising inflation – indeed, to stagflation (reduced growth alongside higher inflation). The initial response to COVID-19 had led to lockdowns, which caused major disruptions to global supply chains and reduced the supply of workers (creating a very tight labor market in the US). Then came two additional supply shocks this year: Russia’s brutal invasion of Ukraine, which has driven up commodity prices (energy, industrial metals, food, fertilizers), and China’s “zero-COVID” response to the Omicron variant, which has led to another round of supply-chain bottlenecks.

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