The fires of inflation are growing bigger in many countries, and governments are scrambling to find the tools needed to douse the flames before they become catastrophic conflagrations. The lowest income households are disproportionally suffering from the scourge of inflation because their incomes are so low they can’t cope with skyrocketing prices.
Another bad news: The World Bank warned that the world economy could slip into a period of stagflation reminiscent of the 1970s. In its latest Global Economic Prospects report, the lender sharply downgraded its outlook for the global economy. It said global growth is expected to slump to 2.9 percent in 2022 from 5.7 percent in 2021— significantly lower than 4.1 percent that was anticipated in January.
“The current juncture resembles the 1970s in three key aspects: persistent supply-side disturbances fueling inflation, preceded by a protracted period of highly accommodative monetary policy in major advanced economies, prospects for weakening growth, and vulnerabilities that emerging market and developing economies face with respect to the monetary policy tightening that will be needed to rein in inflation,” the World Bank report said.
Iain Macleod, a British Conservative Party politician who became Chancellor of the Exchequer in 1970, coined the term stagflation, a combination of stagnation and inflation, in 1965. It describes a malfunctioning economy, in which prices keep soaring while economic growth slumps, and unemployment remains high. Stagflation presents a dilemma for economic policymakers because actions intended to lower inflation may exacerbate unemployment.
Compounding the damage from the Covid-19 pandemic, the Russian invasion of Ukraine has magnified the slowdown in the global economy, which is entering what could become a protracted period of feeble growth and elevated inflation, according to the World Bank report. “This raises the risk of stagflation, with potentially harmful consequences for middle- and low-income economies alike.”
“The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are hammering growth. For many countries, recession will be hard to avoid,” said World Bank President David Malpass. “Markets look forward, so it is urgent to encourage production and avoid trade restrictions. Changes in fiscal, monetary, climate and debt policy are needed to counter capital misallocation and inequality.”
“Restoring long-term prosperity depends on a resumption of faster growth and a more stable, rules-based policy environment. There is good reason to expect that, once the war in Ukraine stops, efforts to rebuild the Ukrainian economy and revive global growth—including by the World Bank Group—will be redoubled,” Malpass said.
In the meantime, Malpass said policymakers must mitigate the other threats to development around the world—“soaring food and energy prices, persistent stagflationary pressure, increasingly perilous debt overhangs, growing inequality and instability, and the myriad risks stemming from climate change.”
“Against the challenging backdrop of higher inflation, weaker growth, tighter financial conditions, and limited fiscal policy space, governments will need to reprioritize spending toward targeted relief for vulnerable populations,” the World Bank chief said.
Malpass urged policymakers to refrain from distortionary policies such as price controls, subsidies, and export bans, which could worsen the recent increase in commodity prices.
Governments are not listening to the World Bank chief because they want to take care of their citizens first. Brace yourself for more difficult times ahead.