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The old abnormality of inflation

The entry into 2022 confronts us with a global economic scenario with an eye still on the global epidemic, but with a return to macroeconomic management problems that seemed forgotten for decades, mainly high inflation and the withdrawal of monetary stimuli from the economy.

We are immersed in the umpteenth wave of covid, with the added human cost but with the relief that the acquired immunity, the evolution of the virus itself and what has been learned during these two years mean that the economic impacts are less and less. In any case, the new variant will slow down the recovery somewhat and will mean lower growth rates in the fourth quarter of 2021 and the first of this year.

Supply problems and bottlenecks in global supply chains are also taking longer than expected, largely due to the extension of the epidemic. Frictions in the value chains had started to improve in October and November, but this improvement has slowed down in December. It is most likely that the flow of goods will gradually normalize, especially from mid-2022, as supply reacts and demand moderates.

In this way, global recovery forecasts have been revised downwards, although growth will continue to be strong, on the path to the trend prior to 2020. Thus, the global economy could grow this year by 4.4%, and 3 .8% next year, with figures well above their potential both in the United States (4.2% and 3.1%, respectively) and in the eurozone (3.7% and 2.7%), and the continuation of the process of structural moderation in China (5.2% in both years).

Beyond growth, the rebound in inflation and its persistence, with the consequent monetary policy response, are the main source of risk for this year and the central focus of macroeconomic management. Inflationary pressures are much greater in the United States than in Europe, and have a significant component of elements linked to the management of the epidemic that are temporary and will be reversed throughout the year. But even so, the question remains whether the perfect storm of all those temporary pressures will not trigger important second-round effects. Both the Federal Reserve and the European Central Bank have reacted with announcements of withdrawal of stimuli, but their challenge for the coming quarters is to find the balance point that curbs inflationary pressures, avoids a recession and does not generate strong turbulence in the financial markets. An old problem of economic policy that we will have to get used to again.

Miguel Jiménez González-Anleo and Enestor Dos Santos, BBVA Research.

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