Global | Stagflation risk?

Summary

Persistent inflationary pressures in recent months in the United States and to a lesser extent in Europe and the slowdown in activity indicators raise fears that in the most extreme scenarios the world economy is heading toward stagflation reminiscent of the 1970s.

Key points

• Key points:
• Over the short term BBVA Research's inflation forecasts point to temporary yet persistent upward pressures that will dissipate as productive capacity increases.
• The question is, how long will it take for supply to meet demand given fears of new Covid variants and waves of contagion?
• Going forward, the key will be to avoid spiraling price and wage increases and a de-anchoring of expectations. This may require monetary policy to act sooner than expected, and even overreact.
• The recovery cannot be expected to continue as fast as during the rebound from the deep trough of 2020 but the near-term consensus is for growth in 2021 and 2022 in the United States and Europe to be above potential.
• Looking to both inflation and growth, policymakers in developed economies have the tools and the time to avoid mistakes and ward off stagflation risks.

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