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

Markus Demary, Anna-Lena Herforth and Jonas Zdrzalek

No 16/2022, IW-Reports from Institut der deutschen Wirtschaft (IW) / German Economic Institute

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.

JEL-codes: E31 E32 E52 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwkrep:162022

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