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The new inflationary environment: How persistent are the current inflationary dynamics and how is monetary policy expected to respond?

Author

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  • Demary, Markus
  • Herforth, Anna-Lena
  • Zdrzalek, Jonas

Abstract

We argue that the period of low inflation has come to an end based on six structural factors, which define the new inflationary environment: [...] How high will inflation rise? How long will the new inflationary environment last? How challenging is it for central banks to counteract these inflationary pressures? A stagflation like in the 1970ies seems possible given these trends. The energy-crisis made the transformation of our energy systems necessary, which is, however, progressing slowly, thereby contributing to a longer lasting energy-triggered inflation. The highest risk will be an energy embargo, resulting in a deep recession together with high inflation. In this case monetary policy might be forced to inject high amounts of liquidity into markets despite high inflation.

Suggested Citation

  • Demary, Markus & Herforth, Anna-Lena & Zdrzalek, Jonas, 2022. "The new inflationary environment: How persistent are the current inflationary dynamics and how is monetary policy expected to respond?," IW-Reports 16/2022, Institut der deutschen Wirtschaft (IW) / German Economic Institute.
    • Handle: RePEc:zbw:iwkrep:162022
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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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