In recent decades, particularly since the onset of the global financial crisis (GFC), structural factors have led to a steady decline in inflation. Globalization, digitalization, and aging populations in advanced economies have acted as potent forces suppressing inflationary pressures.
However, recent crises have caused a reversal in this trend. Inflation has surged due to negative supply-side shocks resulting from containment measures, which have disrupted supply chains, and sanctions on energy imports from Russia, leading to higher gas and oil prices. Even if the conflict in Ukraine were to cease, higher energy prices are expected to persist, becoming a new enduring structural factor.
We identify five structural factors, referred to as the “five Ds,” that will shape the trajectory of inflation in the long term: decarbonization, demographics, digitalization, deglobalization, and debt. These factors are expected to collectively exert inflationary pressures, albeit with significant variations among countries.
Factors such as demographic shifts, with a declining labor force, are anticipated to increase wage pressure. Costs may rise directly due to decarbonization efforts or indirectly due to deglobalization. Digitalization is expected to enhance the pricing power of companies. Additionally, rising debt levels could introduce an inflation bias, potentially compromising central bank independence.
However, the actual inflationary impact of these factors is subject to change and heavily influenced by economic development and policy decisions affecting the supply side. For instance, measures to increase labor force participation rates, such as encouraging older workers and women to engage in full-time employment, could mitigate the impact of declining labor force participation.
Furthermore, the inflationary impact of deglobalization, particularly the decoupling from China, hinges on geopolitical circumstances. Additionally, factors like decarbonization and demographic shifts on the demand side can’t be overlooked. Higher carbon prices, for example, could accelerate the transition away from fossil fuels, reducing the inflationary impact of energy consumption.
Investments in innovation and automation, such as artificial intelligence (AI), are expected to yield higher productivity gains, thereby dampening inflationary pressures.
In conclusion, the actual or adjusted inflationary impact of these factors may differ significantly from their initial effect. Over the long term, the greatest inflationary pressures are anticipated to stem from demographics, deglobalization, and debt, as these trends are more challenging to mitigate and may even exacerbate further. Overall, the combined influence of the five Ds could substantially elevate annual inflation by up to 1 percentage point.
Learn more here: https://www.allianz.com/en/economic_research/insights/publications/specials_fmo/inflation-drivers.html
