Executive Summary

  • Over the last decades, and especially since the global financial crisis (GFC), structural factors have caused a secular decline of inflation. Globalization, digitalization and aging populations in advanced economies have been strong disinflationary forces.
  • The negative supply-side shocks from the recent crises have reversed this trend – inflation has surged on the back of containment measures (constraining supply chains) or sanctions on energy imports from Russia (raising gas and oil prices). While creating more resilient supply chains and onshoring could slow the pace of globalization (and thus reboot inflation due to tighter labor markets), higher energy prices represent a new structural factor, which is likely to persist even if the war in Ukraine comes to an end.
  • We see five structural factors – the five Ds – that will determine the course of inflation over the longer term: decarbonization, demographics, digitalization, deglobalization and debt. The net effect of the factors will be inflationary, with significant variation across countries. The supply of labor is declining, which increases the wage pressure (demographics). Costs are rising directly (decarbonization or rising carbon prices) or indirectly (deglobalization). The pricing power of companies is increasing (digitalization). And rising debt levels could generate inflation bias, which could in turn threaten central-bank independence if debt-sustainability concerns encroach on setting a monetary stance aimed at keeping prices at the inflation target.
  • However, the inflation impact of these factors can change and is significantly influenced by economic development and policy choices affecting the supply side. The decline in the labor force, for example, can be mitigated by countermeasures to increase activity rates (e.g. more older workers and more women in full-time employment).  The inflation impact of de-globalization – or more precisely, decoupling from China – depends heavily on the geopolitical circumstances. 
  • Also the demand side cannot be ignored. Decarbonization is one case in point. The higher the carbon price, the faster energy systems transition away from fossil fuels – and the lower the inflation impact of energy consumption. The same applies to demographics: older people generally consume less and differently, which may have a disinflationary effect due to higher savings (especially if social security systems provide less financial protection at old age). Finally, investments in innovation and automation (e.g. AI) could carry higher productivity gains, which dampen inflation.
  • Therefore, the actual or adjusted inflation impact might be considerably different from the initial impulse. Over the long term, we see the highest inflation pressure coming from demographics, deglobalization and debt as these trends are the hardest to mitigate – and might even deteriorate further. Overall, the five Ds might significantly lift annual inflation (by up to 1pp).