Inflation and Growth Risk: Balancing the Scales with Surveys

Post-pandemic inflation highlighted tensions between price stability and growth objectives. We evaluate this risk using probabilistic responses from professional forecasters’ surveys. Our dynamic factor model with time-varying uncertainty and asymmetry captures the joint dynamics of inflation and growth and decomposes them into demand and supply components. We find that tail risk is prominent in US data in the 1980s and during the Great Recession for inflation, and during the 1980s and in the period following COVID-19 for GDP growth. The post-pandemic inflation is driven by temporary adverse supply and persistent positive demand. The model-implied correlation between inflation and growth is time-varying, negatively related to nominal term premiums and on average positive, suggesting that professional forecasters do not have stagflationary beliefs. In 2022, stagflation risks increased after three decades of near-zero probabilities.