Policymakers thought that inflation had been tamed. Yet, it is back with an unexpected resilience and it looks like it is here to stay.
We have all felt the pinch. Walk into your supermarket and see the price of your favourite drink inch up month by month. It is especially unusual to see the prices creep up with such regularity if you live in a country which had tamed inflation for the last few decades.
As we can see from the graph below, inflation had been tamed in the 1990s in most developed countries around the world. It has snuck back up, but by historical standards, it is not too very high. The problem is inflation usually has momentum, i.e., once it gets going, it is difficult to control. Put another way, inflation is a bit like an energetic dog on its leash. Once it is off, it is very painful to chase down and tame. The last time inflation took off was in the 1970s after the two oil crosses in 1973 and 1979.
The key problem with inflation is that controlling it requires tolerating a period of high unemployment. What we are seeing right now, is the start of a decade where we are going to see high inflation accompanied by high unemployment as the Central Banks and Treasuries around the world try to control inflation by curtailing the monetary policy.
We are likely to see central banks increase interest rates and the government curtailing its spending to control inflation. The impact of this would be unemployment numbers increasing till inflation is back under control.
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