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Secular Stagnation, Not Secular Stagflation

The COVID-19 pandemic and Russia's invasion of Ukraine have left most of the world reeling from the effects of stagflation. But as long as monetary authorities are taking pains to keep inflation expectations anchored, there is little reason to think that such conditions will become the new normal.

NEW YORK – A good case can be made that secular stagnation – sustained slower growth – is looming for most advanced economies, China, and many emerging markets and developing economies dependent on trade and foreign investment. Advocates of this view point to aging populations, deglobalization, climate change and biodiversity loss, rising inequality, and excessive debt, whereas optimists instead tout the potential of younger, dynamic countries and productivity-boosting technologies such as artificial intelligence, robotics, and bioengineering.

Yet even if secular stagnation is our destiny, it is not likely to take the form of secular stagflation, or what Nouriel Roubini calls the “Great Stagflation” (a combination of secular stagnation and persistent, long-term stagflation). Stagflation refers to materially above-target inflation, with unemployment above its natural level and output below its potential. But the more likely scenario for most advanced economies and China is many decades of secular stagnation with generally low inflation rates, interrupted by occasional one- or two-year episodes of transitory stagflation.

There are two distinct drivers of stagflation, both of which can be operative simultaneously. The first occurs when a negative aggregate supply shock boosts inflation while lowering output and raising the unemployment rate, as happened recently with the Russian war-driven spike in global commodity prices and the pandemic-driven disruption of supply chains. If the supply shock is temporary, or if aggregate demand adjusts downward to a permanently lower level of aggregate supply (with some help from tighter monetary policy), the above-target inflation will be transitory as long as inflation expectations don’t become unanchored.