Dr. Doom on Inflation

At Project Syndicate Nouriel Roubini lays out the inflation risks:

The problem today is that we are recovering from a negative aggregate supply shock. As such, overly loose monetary and fiscal policies could indeed lead to inflation or, worse, stagflation (high inflation alongside a recession). After all, the stagflation of the 1970s came after two negative oil-supply shocks following the 1973 Yom Kippur War and the 1979 Iranian Revolution.

In today’s context, we will need to worry about a number of potential negative supply shocks, both as threats to potential growth and as possible factors driving up production costs. These include trade hurdles such as de-globalization and rising protectionism; post-pandemic supply bottlenecks; the deepening Sino-American cold war; and the ensuing balkanization of global supply chains and reshoring of foreign direct investment from low-cost China to higher-cost locations.

Equally worrying is the demographic structure in both advanced and emerging economies. Just when elderly cohorts are boosting consumption by spending down their savings, new restrictions on migration will be putting upward pressure on labor costs.

Moreover, rising income and wealth inequalities mean that the threat of a populist backlash will remain in play. On one hand, this could take the form of fiscal and regulatory policies to support workers and unions – a further source of pressure on labor costs. On the other hand, the concentration of oligopolistic power in the corporate sector also could prove inflationary, because it boosts producers’ pricing power. And, of course, the backlash against Big Tech and capital-intensive, labor-saving technology could reduce innovation more broadly.

What Dr. Roubini does not touch on is that the asset inflation that practically everybody explains by central bank actions is already exacerbating wealth and income inequality and what’s worse that policy produces a positive feedback loop. The more money the Fed stuffs into the pockets of the wealthiest Americans the more those beneficiaries will want it to keep right on doing it.

2 comments… add one
  • Drew Link

    Not sure I’ve ever been comfortable with the supply shock model. If you have a hurricane gasoline and water prices rise. Politicians hold hearings about profiteering, not inflation. They flood the zone with money.

    Is the notion that there is a tipping point in degree or breadth where a supply shock becomes generalized – inflation – and not a rise in a few goods or services?

  • That’s a more complicated question than may meet the eye. When all (or nearly all) prices rise, it’s inflation. Even in the presence of a commodities supply shock when wages start to rise, it’s inflation.

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