Inflation may pave the way to a new era of globalisation

TODAY'S pick-up in inflation was initially driven by large fiscal packages and supply chain disruptions during the pandemic. It is now certain to last much longer because of military conflict and additional disruption of supply chains. Food and fuel price rises are likely to spark discontent, protests and even revolutions across the world. Does this amount to an end of globalisation, pushing national inflation levels even higher?

Early this century, policymakers and academics identified a relationship between globalisation and a transition to low inflation in rich industrial countries, then in Asian emerging markets and ultimately even in Latin America, where inflation had been a way of life. A global labour market pressed wages down in the rich countries, and poorer countries wanted monetary stability.

Fed chair Alan Greenspan explained in 2005 that globalisation and innovation were "essential elements of any paradigm capable of explaining the events of the past 10 years", or what was termed the Great Moderation. As late as 2021, Jay Powell, current Fed chair, still referred to "sustained disinflationary forces, including technology, globalisation and perhaps demographic factors".