Secular Inflation

MILAN – The post-pandemic economy’s high inflationary pressures are being powered in part by secular trends and forces, many of which are operating on the supply side. While there are also transitory factors – such as supply-chain disruptions and bottlenecks, and China’s zero-COVID policy – these presumably will abate at some point. But the secular trends are likely to lead to a new equilibrium in many economies and global financial markets.

In manufactured goods and intermediate products (a substantial share of the tradable part of the global economy), we are emerging from a long period of deflationary conditions, which had been driven by the introduction of massive amounts of previously unused, low-cost, productive capacity in emerging economies. Whenever there is a demand surge, the equilibrium market response will be some combination of supply expansion and price increases, and for the past several decades, the supply expansion clearly dominated, creating deflationary pressures that came to be taken for granted.

But the remaining underutilized productive capacity in the global economy has been declining, and global demand has grown as tens of millions of consumers have joined the middle class. The elasticity of global supply chains has declined, increasing the bargaining power of workers in advanced economies. Evidence of this is not hard to find. Union organizing is expanding and becoming more successful, and employers are finding it difficult to sweep aside potential and current employees’ preferences for hybrid work.