Inflation Risk(1): Changes in Global Inflation Regime
There is growing inflation risk against the backdrop of skyrocketing prices of agricultural products and raw materials.
● The concerns are particularly high in emerging markets, with international prices of agricultural products and raw materials soaring, owing to extreme weather events and poor harvest around the world as well as rising consumption and speculative purchases of food and resources by emerging economies.
The risks indicate a changing landscape for the global economy since the global financial crisis.
● While the global economy experienced disinflation in general in the pre-crisis era, the recent inflationary concerns suggest there is a growing risk of 'reinflation' around the globe.
● Driving forces behind disinflation, including globalization and market trust in monetary policy, were all lost after the recent financial crisis, in effect putting an end to the conventional price stabilization regime.
● Rather, inflation risk looming prior to the Lehman scandal in 2008 was turned into deflation risk right after the financial crisis, but now abundant liquidity is fueling inflationary pressure again, driving price instability or volatility.
Aggressive reflation strategy and growing uncertainties from a variety of sources are the main culprit for the inflationary risk.
● The inflationary risk was resulted from aggressive reflation strategies taken by governments to address the crisis, and particularly, with major anchors that have sustained price stability collapsing, the link from reflation to inflation is being 're-connected', rather than 'short-circuited'.
● In the post-crisis era of "New Normal", unexpected events of black swans or tail risks tend to grow, and the changing condition of global inflation also highly depends on rising instability of international monetary regimes, crisis in global resource management system and other uncertainty factors.
on the other hand, governments are found to be more vulnerable than before to global stagflation risk in their policy execution.
● Decrease in potential GDP after the crisis have fueled inflationary pressure even in a mild recovery stage on the business cycle, and led inflationary sensitivity to grow and the global economy to become vulnerable to external shocks.
● Under the circumstances, while emerging economies have witnessed growing inflationary risk, advanced countries are still faced with high deflation pressure. The dispersed inflationary pressure on the global level may result in global stagflation.
● In terms of policy regime as well, governments are likely to focus on addressing financial risks to control inflation, as they have learnt from the previous crisis, which may mean overlooking inflationary risk and fueling another bout of financial risk factors.