A key question facing central banks today is whether the observed inflationary shocks are cyclical versus structural in nature. Will they revert over time, or do they reflect fundamental and permanent shifts in inflation pathways?

Using an econometric research design based on an intuitive model outlined by Stock and Watson (2007), results show that inflationary shocks have become more permanent in recent months. This trend, if persistent, will impact how economic growth, consumer behavior and monetary policy are shaped in important ways in the years ahead.

Are the inflationary shocks observed today likely to dissipate, and is inflation likely to return to normal levels? Or, are these shocks likely to exhibit some permanence, reflecting structural shifts in a world transformed after the pandemic and the outbreak of the war in Ukraine?

Our experts, Ramu Thiagarajan and Hanbin Im, discuss the implications of the abatement of such forces that have held down inflation for decades, and how this trend may result in a radical change to the global economy.