ART: ISTOCK / IMAGEDEPOTPRO
Today’s surge in inflation grows out of the interplay of supply chain disruptions with large fiscal deficits. The pandemic, followed by Russia’s invasion of Ukraine, upended supply chains and produced scarcities. Rich industrial countries responded to the shortages, inequalities, and social stress with large fiscal packages. In the ensuing spiral, increased spending led to more demand, which led to more shortfalls. Another vicious spiral may follow. Rising food and fuel prices could spark discontent, protests, even revolutions and government breakdowns around the world.
The inflationary spiral may appear to herald a quite different world, split into competing blocs that pursue costly “friendshoring” strategies of steering trade to friendly nations and regimes while attempting to hobble rivals. Large states rethink the benefits of globalization and attempt to protect what they see as vital or strategic resources. This adds up to a recipe for freezing global economic growth.
As much as globalization has come under attack lately, history suggests that it may be the wrong target for renewing policy and that globalization offers an antidote to inflationary spirals. The hunger crises of the mid-19th century and the oil shocks of the 1970s at first ignited explosive rounds of worldwide inflation. In both cases, new technologies dramatically altered global supply systems, expanding globalization and leading to lengthy periods of disinflation. Thus, rampant inflation eventually drove the world to more rather than less globalization, with broad benefits.
The same forces are likely to come into play today. The benign price environment of the early 21st century grew out of better central bank policy but also reflected the opening of world goods and labor markets. A global labor market pressed wages down in rich countries, and poorer countries wanted monetary stability so they could access global markets without disruption.
Policymakers and academics identified the relationship between globalization and a transition to low inflation around the world, first in rich industrial countries, then in Asian emerging markets, and ultimately even in Latin America, where inflation had been a way of life. In 2005, then-Federal Reserve Chairman Alan Greenspan argued that globalization and innovation were “essential elements of any paradigm capable of explaining the events of the past 10 years,” or what was termed the Great Moderation. As late as 2021, today’s Fed chairman, Jay Powell, referred to “sustained disinflationary forces, including technology, globalization and perhaps demographic factors.”
There is a historical pattern of globalization driving disinflation. What is usually thought of as the first age of modern globalization began in the middle of the 19th century with the hunger crises. It was interrupted by World War I, followed by the Great Depression. Eventually, a new style of globalization took of in the 1970s. Both turning points—in the 1840s and 1850s and in the 1970s—started with shortages and inflationary surges (see Charts 1 and 2).