As the global economy continues to battle pandemic-related instability and geopolitical conflicts, there are growing concerns that inflation may be here to stay.
On Monday, Goldman Sachs’ CEO David Solomon issued a stark warning that the world is at risk of seeing global inflation remain for years to come. Pointing to the disruptions from COVID-19, as well as Russia’s war in Ukraine, Solomon said both supply and demand have been thrown into disarray, driving prices higher.
“We see inflation deeply entrenched in the economy, and what’s unusual about this particular period is that both demand and supply are being affected by exogenous events, namely the pandemic and the war on Ukraine,” Solomon told analysts during an earnings call.
The virus has upended many of the traditional supply chains that businesses have long relied on to meet demand. Shutdowns in manufacturing hubs like China have led to shortages and delays in deliveries that have dragged prices higher worldwide.
Since Russia launched its invasion on Feb. 24, commodity prices have risen sharply, especially for agricultural and energy products. This has led to fears of a global food crisis that will be disproportionately felt in developing countries, according to international organizations. Peace talks to end the fighting or reduce supply-chain disruptions have not materialized.
Solomon’s warning echoes fears expressed by Federal Reserve officials in recent weeks. According to the minutes from a recent Fed meeting, the central bank expressed concern that inflation may become entrenched if it is not slowed in the near term.
“[Fed] participants judged that a significant risk…was that elevated inflation could become entrenched if the public began to question the resolve of the [Federal Open Market] Committee to adjust the stance of policy as warranted,” it said.
Betsey Stevenson, a former Labor Department economist and an economics professor at the University of Michigan, cautioned that the possibility remains that inflation can stay in place for years to come.
Stevenson noted that many of the factors driving up inflation are beyond the reach of the Fed and other central bankers, such as oil prices and disruptions from either the war or pandemic.
“I think the most worrying thing for the Fed is people are starting to expect inflation will stay high for some time. And as you form expectations around higher inflation it becomes a self-fulfilling prophecy,” Stevenson told the Harvard Gazette in a June interview.
Solomon maintained that the economic climate remains in flux.
“I expect there’s going to be more volatility and there’s going to be more uncertainty and in light of the current environment we will manage all our resources cautiously,” Solomon said.
New York Times columnist and economist Paul Krugman recently touched on why markets have been relaxed amid the uncertainty of inflation. Krugman wrote that markets “appear to believe that the worst is behind us, that inflation is about to come down sharply.”