Causes and consequences of global inflation

In the last two years the global economy has experienced a strong wave of inflation that has affected not only developing countries, but also developed economies, where inflation has not been seen at this level during last 50 years. This paper examines the causes of inflationary shocks with an emphasis on the analysis of the advanced of countries. The main factor is the disparity between the rapid recovery of aggregate demand after the 2020 recession and limited aggregate supply, with supply chains disrupted. Massive government support measures have contributed to stimulating demand. The paper analyzes the reasons why such a sizable inflationary shock turned out to be unexpected, and also why the monetary authorities of developed countries postponed the tightening of monetary policy. It is shown that shock identification was complicated by a high level of uncertainty, structural shifts in the labor market and in consumer demand. Central banks preferred to take a careful approach, fearing that tightening would lead to a public finance crisis and recession. The similarities and differences between the current inflationary episode and the stagflation of the 1970s are considered, and an assessment is made of the possibility of a recurrence of stagflation.