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Markus Demary / Michael Hüther IW-Report No. 12 8. April 2021 Global Inflation: Low for Long or Higher for Longer?

Inflation has started to increase, and the return of inflation comes at a time in which economies begin to recover from pandemic-induced and lockdown-induced recessions. This raises questions about how much and how long inflation will go up as well as about whether central banks have to step-up against inflation at the cost of slowing down the economic recovery. Has “low for long” turned into “higher for longer”?

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Low for Long or Higher for Longer?
Markus Demary / Michael Hüther IW-Report No. 12 8. April 2021

Global Inflation: Low for Long or Higher for Longer?

German Economic Institute (IW) German Economic Institute (IW)

Inflation has started to increase, and the return of inflation comes at a time in which economies begin to recover from pandemic-induced and lockdown-induced recessions. This raises questions about how much and how long inflation will go up as well as about whether central banks have to step-up against inflation at the cost of slowing down the economic recovery. Has “low for long” turned into “higher for longer”?

We look at the different possible factors that could drive inflation, like pandemic- and lockdown-induced pend-up demand, price-wage-spirals, fiscal policy and other relevant factors. We conclude from our analysis that inflation could possibly rise in the short-term, but that inflation will return to low rates in the medium-term. While pend-up demand will result in higher prices, the inflation effect will only be transitory and moreover concentrated on services related to tourism and accommodation and be absent in other sectors where digital alternatives leading to more competition are available.

Even in the case in which the combination of accommodative monetary policy and expansionary fiscal policy would close the output gap and drive the economy towards a state of overheating, we expect a low inflationary effect because of the flat Phillips-curve.

Thus, we do not expect any trade-offs for central banks between fighting inflation and supporting the economies to grow and to deleverage. Instead, we see a welcomed return of inflation towards its target value accompanied by an economic recovery that enables central banks to end their asset purchasing programmes and their negative interest rate policies in a natural way, that means we expect higher interest rates without risks to the economic recovery.

Download PDF
Low for Long or Higher for Longer?
Markus Demary / Michael Hüther IW-Report No. 12 8. April 2021

Global Inflation: Low for Long or Higher for Longer?

German Economic Institute (IW) German Economic Institute (IW)

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A Macroeconomic Analysis of Wage-Price Spirals
Thomas Obst / Maximilian Stockhausen IW-Analyse No. 155 9. January 2024

A Macroeconomic Analysis of Wage-Price Spirals

The subject of this Analysis is the forms that wage-price spirals can take and how they influence macroeconomic stability and inflationary trends in Germany.

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Markus Demary / Niklas Florian Taft IW-Report No. 31 26. May 2023

The Energy Dependence of Bank Loans

Russia's war against Ukraine has highlighted the vulnerability of the Federal Republic of Germany to Russian energy imports, especially natural gas.

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