“And take all this evidence of moderating inflation with considerable caution: for at least three reasons. The first is that central banks have no control over the pace of inflation because rising prices have not been driven by ‘excessive demand’ from consumers for goods and services or by companies investing heavily, or even by uncontrolled government spending. It’s not demand that is ‘excessive’, but the other side of the price equation, supply, is too weak. And there, central banks have no traction. They can hike policy interest rates as much as they deem, but it will have little effect on the supply squeeze. And that supply squeeze is not just due to production and transport blockages, or the war in Ukraine, but in my view, even more so to an underlying long-term decline in the productivity growth of the major economies.
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That means the major economies could enter a period of stagflation, not seen since the late 1970s, where inflation rates stay high, but output stagnates. Indeed, it could be worse than that. The risk of an outright global slump is rising. If central banks continue to hike their policy rates, all that will do is increase of cost of borrowing for consumers and companies, driving weaker companies into bankruptcies and suppressing demand across the board. Sure, that may finally reduce inflation but only through a slump.”