Central banks’ efforts to contain high and rising inflation are fueling growth headwinds and threatening to tip the global economy into recession.
But the proximate cause of today’s inflationary pressures is a large, broad-based and persistent imbalance between supply and demand. Higher interest rates will dampen demand, but supply-side measures must also play a large role in inflation-taming strategies.
Over the past year or so, the rollback of pandemic-containment policies has spurred a simultaneous surge in demand and contraction in supply. While this was to be expected, supply has proved surprisingly inelastic. In labor markets, for example, shortages have become the norm, leading to canceled flights, disrupted supply chains, restaurant closures and challenges to health care delivery.