The Stagflation Threat Is Real, by  Nouriel Roubini Aug 30, 2021

 

        While these persistent negative supply shocks threaten to reduce potential growth, the continuation of loose monetary and fiscal policies could trigger a de-anchoring of inflation expectations. The resulting wage-price spiral would then usher in a medium-term stagflationary environment worse than the 1970s – when the debt-to-GDP ratios were lower than they are now. That is why the risk of a stagflationary debt crisis will continue to loom over the medium term.  

There is a growing consensus that the US economy’s inflationary pressures and growth challenges are attributable largely to temporary supply bottlenecks that will be alleviated in due course. But there are plenty of reasons to think the optimists will be disappointed.

 

 In fact, there are multiple factors behind this summer’s mini-stagflation. For starters, 

the Delta variant is temporarily 

    boosting production costs, 

    reducing output growth, and 

    constraining labor supply. 

Workers, many of whom are still receiving the enhanced unemployment benefits that will expire in September, are reluctant to return to the workplace, especially now that Delta is raging. And those with children may need to stay at home, owing to school closures and the lack of affordable childcare. 

 On the production side,
Delta is 

    disrupting the reopening of many service sectors and 

    throwing a monkey wrench into global supply chains, ports, and logistics systems. 

Shortages of key inputs such as semiconductors are further hampering production of cars, electronic goods, and other consumer durables, thus boosting inflation. 

 

 

For starters, there is the

     trend toward deglobalization and 

    rising protectionism, 

    the balkanization and reshoring of far-flung supply chains, and 

    the demographic aging of advanced economies and 

    key emerging markets. 

Tighter immigration restrictions are hampering migration from the poorer Global South to the richer North. The Sino-American cold war is just beginning, threatening to fragment the global economy. And climate change is already disrupting agriculture and causing spikes in food prices.  

Moreover, persistent global pandemics will inevitably lead to more national self-reliance and export controls for key goods and materials. Cyber-warfare is increasingly disrupting production, yet remains very costly to control. And the political backlash against income and wealth inequality is driving fiscal and regulatory authorities to implement policies strengthening the power of workers and labor unions, setting the stage for accelerated wage growth.