The global economy is clearly at a turning point: commodity prices have in many cases reached record levels, interest rates are starting to rise and stock markets have plunged from vertiginous heights. The increasing possibility of a global recession may give pause to both commodity price and interest rate rises. Still, there is an undeniable sense that these events may not be a temporary adjustment, but a multilayered response to more fundamental changes in the global economy.

The many causes of inflation

It is difficult to see through the many layers of these developments because there is much to distract us right now. The extreme policy measures used to fight Covid would be enough to give global growth a serious kick upwards. For example, the ten or so trillion additional dollars in securities acquired by the leading central banks combined with the nearly two trillion dollar fiscal response from the US government. Add to this the massive supply shocks to primary energy and grain markets from the Russian invasion of Ukraine and we can easily begin to understand why global inflation has picked up sharply while growth, having at first accelerated out of Covid, now seems on the brink of failing and tipping us back into recession.

The evolving market perspective has been that, after a smallish rise in world interest rates, and a mildish recession — depending on where you happen to live — inflation will fall and we will be back to where we were in 2018 before Covid struck. Or perhaps not. Economic commentators have flip-flopped between a range of positions.