Experts from the World Bank finally admitted that the risk of stagflation is getting bigger and more real.
Better Late Than Never
First they ignore you, then they laugh at you, then they fight you, and finally you win. Indeed, several months ago, pundits were dismissing the possibility of stagflation. The possibility that I was emphasizing almost from the very beginning of the pandemic-related economic crisis and the subsequent jump in inflation. In the summary of the Gold Market Overview for April 2021, I wrote:
The US economy is likely to shift from an economic recovery to stagflation in the upcoming months. Even the Fed itself admits that inflation will jump this year. Of course, the central banks are trying to convince us that inflation will be only transitory, but it’s possible that they underestimate the inflationary risk and overestimate their ability to deal with it.
This is exactly where we are right now. After months of saying inflation was temporary and laughing at warnings of stagflation, this time is different! In its latest report, Global Economic Prospects, the World Bank admitted that “stagflation risks are rising amid a sharp slowdown in growth.” The institution reduced its global growth forecast from 5.7 percent in 2021 to 2.9 percent in 2022, which is significantly lower than the 4.1 percent that was predicted in January. What’s really disturbing is that between 2021 and 2024, global growth is projected to have slowed by 2.7 percentage points—more than twice the deceleration between 1976 and 1979.
Oops! Houston, we have a problem! Indeed, as World Bank President David Malpass said in the foreword to the report, the risk of stagflation is likely now:
Amid the war in Ukraine, surging inflation, and rising interest rates, global economic growth is expected to slump in 2022. Several years of above-average inflation and below-average growth are now likely, with potentially destabilizing consequences for low- and middle-income economies. It’s a phenomenon—stagflation—that the world has not seen since the 1970s.
The danger of stagflation is considerable today. Subdued growth will likely persist throughout the decade because of weak investment in most of the world. With inflation now running at multi decade highs in many countries and supply expected to grow slowly, there is a risk that inflation will remain higher for longer than currently anticipated.
Treasury Secretary Janet Yellen also admitted this month that she was wrong a year ago when she said she anticipated inflation would be “a small risk,” “manageable” and “not a problem.” In an interview for CNN, she said:
“I was wrong about the path inflation would take. As I mentioned, there have been unanticipated and large shocks to the economy that have boosted energy and food prices. And supply bottlenecks that affected our economy so badly that I didn’t, at the time, fully understand”.Rumors have it that Yellen has educated herself a bit recently.