JRI Research Journal;Vol.5 No.9,
Inflation Uncertainty will Reduce the World Economic Growth - Avoidance of economic fragmentation and transparency in monetary policy are essential
Shinichi Nishioka
Summary
High inflation is occurring worldwide. Shortages in the supply of components and the disruption of distribution networks are continuing, and prices of consumer goods are rising significantly. Concerns about fossil fuel supply shortages due to decarbonization and Russian sanctions are also pushing up prices, especially for energy. In the U.S. and other countries, service prices are also rising, and higher wages due to labor shortages are being reflected in prices.
If the supply-demand crunch persists, high inflation could become the norm and the amplitude of fluctuations in inflation rates could increase. Attention needs to be paid to the following two factors, which raise the amplitude of inflation rate fluctuations: The first is the retreat of globalization. Narrowing procurement options due to the fragmentation of economic spheres and other factors will lead to more intense supply-demand fluctuations, and stagnant competition among firms will make it easier for cost fluctuations to be passed on to prices. The second is that the policy stances of central banks are unclear. During periods of high inflation, central banks are more likely to face a tradeoff between the real economy and inflation, and there may be more occasions when inflation stabilization is put on the back burner out of concern for the economy.
The concern is that greater volatility in inflation rates will reduce economic growth rates. There are two possible paths to this: 1) a path that makes it difficult to predict future earnings and incomes and thus curbs spending by firms and households, and 2) a path in which a widening of the risk premium raises interest rates and depresses consumption and investment. According to estimates, if inflation volatility increases to the level of the 1980s, annual economic growth would be pushed down by just under 0.2 percentage points worldwide and 0.3 percentage points in advanced economies. To sustain economic growth through price stability, it will be important to further enhance transparency in monetary policy and take steps to avoid economic fragmentation, such as establishing international coordination structures and trading rules.