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How do we know if the world economy is confronting a stagflation scenario? Persistent negative growth surprises combined with persistent positive inflation surprises is one answer. Defined in this way, the recent evolution of Citigroup’s growth and inflation surprise indices suggest we are close to – or even in the midst of – such a scenario at present (see figure above).
How long this stagflation scenario will endure is more difficult to fathom. The behaviour of commodity prices and inflation surprises will probably hold the key for the near-term (see figure below). How policymakers subsequently respond and how other fundamental factors behave (e.g. labour markets and productivity growth) will be more important for the medium-term.
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