US inflation and growth risks: Demand, supply, stagflation
A Banque de France study measures US inflation and growth risks from 1981 to 2024, disentangling demand and supply drivers. It finds post-pandemic inflation reflected temporary supply and persistent demand, with stagflation fears rising in 2022.
A new lens on inflation and growth
A Banque de France study uses surveys of professional forecasters to develop a framework for jointly evaluating US inflation and growth risks.
This methodology disentangles demand and supply drivers, tracking evolving concerns about stagflationary episodes.
Professional forecasters' responses, by virtue of their forward-looking nature, assess risks to inflation and output growth, especially useful in periods of high uncertainty.
A dynamic factor model combines realised data and survey-based expectations, capturing macroeconomic risk perceptions.
This approach distinguishes between demand- and supply-driven forces by observing how they move inflation and real activity.
Demand shocks move them in the same direction, while supply shocks move them in opposite directions.
The study, using quarterly US data from 1981 Q3 to 2024 Q1, shows that post-pandemic inflation reflected temporary supply disruptions and persistent demand strength.
The return of stagflation risk
The study reveals a notable return of stagflation risk in the US, a phenomenon largely absent for three decades.
The estimated probability of a stagflationary episode, defined as year-on-year inflation above 4% and GDP growth below 0%, rose sharply in 2022 to levels not seen since the early 1990s.
This increase is striking after 30 years of near-zero risk.
Furthermore, the relationship between inflation and economic activity has shifted.
While demand forces dominated since the Great Recession, leading to a positive correlation, this link has weakened sharply since the pandemic (up to 2024Q1), indicating a growing role for supply-side factors in shaping inflation and growth dynamics.
Timely insights, enduring questions
This research offers timely insights into the complex drivers of post-pandemic inflation and the re-emergence of stagflation concerns.
While the survey-based methodology provides a valuable forward-looking lens, its reliance on forecaster perceptions might limit its predictive power for truly unprecedented shocks.
Nevertheless, the disentanglement of demand and supply factors provides a crucial framework for policymakers navigating an uncertain economic landscape.
Source: US inflation and growth risk through expert eyes
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