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Published on Monday, June 28, 2021

Global | A new decade for inflation

The most recent U.S. inflation rate of 5%, a level unseen since 2008, has set the alarm bells ringing. In the eurozone, where recovery is intense but less dynamic, inflation is also rising, reaching 2% in May.

Key points

  • Key points:
  • There are temporary factors that are pushing up inflation, which are set to fade as production capacity is recovered. However, there are also longer-lasting factors. The energy transition, structural changes and interaction of fiscal and monetary policy could easily give rise to a situation where inflation is substantially higher this decade than it was in the last.
  • It would not be surprising to see an average increase of more than one point above the previous decade, in any case reaching levels much lower than those seen in the 1970's, when average U.S. inflation was 7.1%.
  • As available production capacity in the eurozone is greater, the fiscal stimulus is smaller and the ECB's objectives differ from those of the Fed, inflation in this area is expected to remain lower than in the U.S.
  • So long as there is no wage-price spiral and a de-anchoring of inflation expectations, this scenario in which inflation is higher than in the previous decade could even be benign. But it also makes it more likely that monetary policy will be driven to overreact in the future.
  • We are still a long way off this scenario and there is more than enough time to prevent it, as indicated by the Fed's recent undertaking to stop it from happening.

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