Factors of global inflation in 2021–2022

The paper examines the factors of global inflation acceleration in 2021–2022. We consider primarily the developed economies, where rates of inflation over the last two years have exceeded multi-year highs and have significantly exceeded target levels. We find that the cause of accelerating inflation was an imbalance between aggregate demand, which started to increase rapidly in the second half of 2020 as economies began to adapt to the circumstances of the pandemic, and aggregate supply, which encountered persistent constraints associated with interruptions in global supply chains. Significant support for demand was provided by fiscal stimulus that was unprecedented in scale and was accompanied by policy interest rates reaching extremely low levels, and by active injections of liquidity by central banks. The willingness of governments to implement ultra-expansionary monetary and fiscal policies can to a considerable degree be attributed to the fact that during the previous decade large budget deficits, zero interest rates, and programs of quantitative easing had not resulted in macroeconomic destabilization. We examine the view of many central banks that the inflationary wave would not be long-lasting, which was a crucial reason for delaying the interest rates increase. We consider the conditions in which the leading economies might fall into the stagflation trap.