Stagflation for the ages

EARLY FIVE YEARS ago, I warned that stagflation was only a broken supply chain away.

- STEPHEN S ROACH

A temporary outbreak did indeed occur in the immediate aftermath of the Covid-19 shock, as a surge in inflation coincided with an anaemic recovery in global demand. But, like the pandemic, that economic disruption quickly subsided. Today, a more worrisome form of stagflation is in the offing, threatening severe and lasting consequences for the global economy and world financial markets.

An important difference between these two strains of stagflation is the nature of the damage. During the pandemic, supply chains were stressed by significant demand shifts — during early lockdowns, people consumed more goods and fewer services, with a sharp reversal taking place after reopening. This led to soaring commodity prices, semiconductor shortages, and global shipping bottlenecks, which collectively accounted for about 60% of the surge in US inflation in 2021-22. It took roughly two years for those supply-chain disruptions to begin to fade, allowing inflationary pressures to ease.

Such temporary disruptions now seem almost quaint compared to the fundamental reordering of global supply chains sparked by US President Donald Trump's "America First" protectionism. The United States, for all intents and purposes, is disengaging, or decoupling, from global trade networks, especially from China-centric supply chains in Asia and potentially even from the supply chains that knit together North America through the US-Mexico-Canada Agreement, the so-called "gold standard" of trade agreements.