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The supply-side fight against inflation

Michael Spence
Michael Spence7/6/2022 04:21 PM GMT+08  • 5 min read
The supply-side fight against inflation
China’s zero-Covid-19 policy is fuelling global inflation Photo: Bloomberg
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Central banks’ efforts to contain high and rising inflation are fuelling growth headwinds and threatening to tip the global economy into recession. But the proximate cause of today’s inflationary pressures is a large, broad-based, and persistent imbalance between supply and demand. Higher interest rates will dampen demand, but supply-side measures must also play a large role in inflation-taming strategies.

Over the past year or so, the rollback of pandemic-containment policies has spurred a simultaneous surge in demand and contraction in supply. While this was to be expected, supply has proved surprisingly inelastic. In labour markets, for example, shortages have become the norm, leading to cancelled flights, disrupted supply chains, restaurant closures and challenges to healthcare delivery.

These shortages appear to be at least partly the result of a pandemic-driven shift in preferences. Many types of workers are seeking greater flexibility — including hybrid or work-from home options — or otherwise improved working conditions. Healthcare workers, in particular, report feeling burned out by their jobs.

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