Striking a balance: risks to growth require 'light-touch' policy on inflation

THE global economic shutdown we experienced in mid-2020 was unique in recent history for its ability to disrupt the flow of goods, services and labour around the world. Since then, regionalised shutdowns in response to the resurgence of Covid-19 infections have been implemented periodically, often with very little warning. Global supply chains have been badly affected by this uncertainty, struggling to cope with the rapid recovery in demand for goods.

This outsized demand is linked with healthy consumer and business balance sheets, helped by generous monetary and fiscal policies. As a result, we have seen inflation rise sharply in both developed and emerging markets (EMs), causing concern for policymakers, companies and investors.

US core inflation (less energy and food) was running at 4.9 per cent on an annualised basis in November 2021, well above the US Federal Reserve's stated long-term target. Base effects have heightened this figure, but it has been elevated for the past 8 months. There was a similar dynamic in the United Kingdom, Canada, the eurozone and a range of EM countries.