Global trends like trade barriers, aging populations, and renewable energy transition could make inflation worse
A recent research report from the Peterson Institute for International Economics (PIIE) suggests that managing global inflation could become increasingly challenging in the upcoming years. The report posits that these developments might lead to diverse and intricate effects on inflation rates in various countries and regions. These effects would hinge on the unique economic setups, policy approaches, and external surroundings of each area.
Additionally, the report cautions that these shifts might complicate the task of central banks in attaining their inflation targets and upholding stable pricing.
You can read also: Double Crisis Impact: Inflation and COVID Drive 68 Million into Poverty across Asia
Within the paper, three global trends are pinpointed as potential drivers of inflation fluctuations in the medium to long term:
- The escalation of trade barriers
- The maturation of populations and
- The transition towards renewable energy sources.
Rising trade barriers could increase costs and reduce competition
The document indicates that the escalation of trade barriers, encompassing tariffs, quotas, sanctions, and non-tariff measures, has the potential to elevate both production and consumption costs. This could consequently lead to diminished competition and efficiency within the global market. The paper underscores instances like the US-China trade conflict, the UK’s departure from the European Union (EU), and the impact of the COVID-19 pandemic as contributors to the surge in trade protectionism.
Furthermore, the paper underscores that heightened trade barriers could trigger direct and indirect repercussions on inflation. Direct effects involve the augmentation of prices for imported goods and services, along with increased costs of intermediary inputs for domestic manufacturers. Indirect effects encompass diminished productivity growth, decreased potential output, and lowered real exchange rates.
The paper expounds that the influence of heightened trade barriers on inflation hinges on factors such as the economy’s size, openness, and competitiveness, as well as the extent and duration of the trade-related shock. Additionally, the document highlights the challenge that central banks might encounter in distinguishing between transient and enduring shocks, along with the complexity of aligning their monetary policies accordingly.
Aging populations could reduce labor supply and increase social spending
The paper underscores that societies with aging populations, characterized by decreased fertility rates, increased life expectancy, and reduced labor force participation, could encounter a contraction in available workforce and an augmentation in social expenditures across various nations. This phenomenon is particularly observable in advanced economies such as Japan and Germany, and it is also manifesting in certain emerging markets like China and Brazil.
Additionally, the paper elaborates that aging populations could elicit dual effects on inflation, emanating from both the demand and supply sides. Demand-side impacts encompass dampened consumption expansion, decreased investment growth, and escalated public expenditures on pension and healthcare services. Supply-side repercussions involve reduced growth in labor productivity, diminished potential output expansion, and lowered real interest rates.
The degree to which aging populations affect inflation might hinge on factors such as the nation’s demographic makeup, fiscal strategy, and monetary approach, as highlighted in the text. The paper further alludes to the complexities central banks might encounter in striking a balance between propelling economic growth and curbing inflationary pressures.
Renewable energy transition could increase volatility and uncertainty
The document outlines that the shift towards renewable energy, motivated by environmental considerations and technological advancements, has the potential to amplify the volatility and uncertainty of energy costs within the global marketplace. This transformation involves a transition away from conventional fossil fuels like oil, coal, and gas, towards cleaner energy sources such as solar, wind, and hydro.
The transition to renewable energy could instigate both favorable and unfavorable impacts on inflation. On the positive side, these changes could yield reduced carbon emissions, decreased energy reliance, and long-term diminished energy expenses. Conversely, drawbacks might encompass heightened investment outlays, escalated adaptation expenditures, and increased short-term fluctuations in energy prices.
The repercussions of the renewable energy transition on inflation might diverge based on the velocity, scope, and synchronization of the transition procedure, as highlighted within the paper. The document also underscores the potential challenges central banks might encounter in projecting and reacting to fluctuations in energy prices.