spence152_Yu Fangping  CostfotoFuture Publishing via Getty Images_supply inflation Yu Fangping / Costfoto/Future Publishing via Getty Images

The Supply-Side Fight Against Inflation

Central banks’ only real option for tackling inflation is to reduce demand – an approach that implies a significant drag on global growth. But even as interest rates rise, a recession can be avoided if policymakers recognize the large role that supply-side measures must play in restoring price stability.

MILAN – Central banks’ efforts to contain high and rising inflation are fueling growth headwinds and threatening to tip the global economy into recession. But the proximate cause of today’s inflationary pressures is a large, broad-based, and persistent imbalance between supply and demand. Higher interest rates will dampen demand, but supply-side measures must also play a large role in inflation-taming strategies.

Over the past year or so, the rollback of pandemic-containment policies has spurred a simultaneous surge in demand and contraction in supply. While this was to be expected, supply has proved surprisingly inelastic. In labor markets, for example, shortages have become the norm, leading to canceled flights, disrupted supply chains, restaurant closures, and challenges to health-care delivery.

These shortages appear to be at least partly the result of a pandemic-driven shift in preferences. Many types of workers are seeking greater flexibility – including hybrid or work-from-home options – or otherwise improved working conditions. Health-care workers, in particular, report feeling burned out by their jobs.

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