**The World Bank’s latest Global Economic Prospects report raises the risk of stagflation, with potentially harmful consequences for middle- and low-income economies alike.**
**Global growth is expected to slump from 5.7 percent in 2021 to 2.9 percent in 2022 — significantly lower than 4.1 percent that was anticipated in January. It is expected to hover around that pace over 2023-24...**
**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.**
**However, the ongoing episode also differs from the 1970s in multiple dimensions: the dollar is strong, a sharp contrast with its severe weakness in the 1970s; the percentage increases in commodity prices are smaller; and the balance sheets of major financial institutions are generally strong. More importantly, unlike the 1970s, central banks in advanced economies and many developing economies now have clear mandates for price stability, and, over the past three decades, they have established a credible track record of achieving their inflation targets....** [end quote]
“Central banks in advanced economies and many developing economies now have clear mandates for price stability” means that the World Bank is confident that the Fed and other central banks will raise interest rates and keep them high until inflation comes down.
I’m not quite as confident. But if they don’t, the result will be resurgent inflation like the 70s.
The markets and economy are in for a long, hard slog. Harder for lower-income countries.