"Raw Material Price Surge Stimulates Inflation... Low Possibility of Stagflation"

[Asia Economy Reporter Seo Sojeong] Although the recent sharp rise and high volatility in raw material prices are fueling inflation, an analysis suggests that the possibility of a severe stagflation recurrence like that of the 1970s is low due to decreased oil dependency.

At the BOK International Conference held by the Bank of Korea on June 2-3 under the theme "The Changing Role of Central Banks: What Can and Should Be Done," Shin Hyun-song, Head of the Research Department at the Bank for International Settlements (BIS), who delivered the keynote speech, stated, "Central banks around the world need to continuously pursue policy normalization to prevent the rising inflationary pressures from translating into higher inflation expectations."

Shin cited the reduced oil dependency as the reason for the low likelihood of a recurrence of the stagflation experienced in the 1970s. He explained, "Although the recent rise in raw material prices is broader in scope than in the 1970s, the impact of oil price shocks is relatively limited, and overall inflationary pressure is not yet at a threatening level." The global economy's oil dependency has steadily decreased, with the share of oil in energy consumption falling from about 50% in the late 1970s to around 30% in 2020, while the share of renewable energy rose from 6% to 16%.

He also estimated that a 10% increase in oil prices due to supply shocks would lead to about a 0.5% decline in the GDP of major advanced economies after an eight-quarter lag. Shin said, "Rising raw material prices lead to short-term inflation increases in importing countries, but as the negative impact on GDP grows, inflation may actually decrease in the medium term." Inflation forecasts indicate that both advanced and emerging countries will maintain levels significantly above targets throughout this year, but next year, inflation in advanced countries is expected to be slightly above target, while in emerging countries it is expected to fall within target ranges.

He emphasized, "Unlike typical recessions since the 1990s, asset prices have risen after the COVID-19 crisis, and household debt has increased, especially in emerging countries. Considering these conditions, whether the economy can achieve a soft landing through future policy normalization depends on how quickly inflation can be restored to previous low levels before households and businesses incorporate inflation into their decision-making."

Furthermore, concerns were raised that interest rate hikes by major countries to curb inflation could trigger capital outflows from emerging markets, leading to calls for issuing global safe asset bonds backed by sovereign bonds from emerging and developing countries.

On the same day, Marcus Brunnermeier, Professor of Economics at Princeton University, USA, pointed out, "Since COVID-19, global inflationary pressures have surged sharply, leading to policy rate hikes by major countries and growing concerns about capital outflows from emerging markets and increased instability in international financial markets." He noted, "Rapid capital outflows from emerging markets partly stem from the asymmetric supply of safe assets, which is concentrated in a few advanced countries."

Professor Brunnermeier added, "As an alternative to mitigate instability in international financial markets, global safe asset bonds backed by sovereign bonds from emerging and developing economies (EMDE) should be issued to diversify the supply of safe assets. This is expected to prevent capital concentration in advanced countries and encourage capital to remain to some extent in emerging markets."

This content was produced with the assistance of AI translation services.