As we look ahead to 2022, should investors fear a return to stagflation—the toxic mix of high inflation and low growth that blighted the global economy during much of the 1970s—or are the sharp price rises and the slowing recovery only temporary? We expect this debate to intensify over the next five to six months as high energy prices, supply bottlenecks, and labor shortages take their toll.
There is no doubt that the global recovery is already slowing, as evidenced by the evolution of our Global Cycle Index (FIGURE 1), which has started to move downward and is likely to go lower over the next three to six months (we expect it to move to the level indicated by the blue dot). At the same time, we anticipate that global inflation, as measured by the MSCI World Price Index, will stay high given the rise in energy prices, which could accelerate in the event of a cold winter in the northern hemisphere, and persistent supply constraints. Elevated energy prices are also a negative for growth, as they erode confidence and squeeze real incomes.