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![]() ![]() Firms are able to set higher prices because demand outstrips supply, and workers receive higher wages given a low unemployment rate. When aggregate demand for goods, services, and labor is strong, coupled with positive animal spirits, optimism about the future, and possibly loose monetary and fiscal policies, you get stronger than potential economic growth and higher than target inflation. Usually inflation is associated with high economic growth. For a long time, until 2021, inflation-the increase in prices year to year-was below the advanced economies’ central banks’ target of 2%. You may have barely heard about inflation. Unless you are middle-aged and gray-haired, you probably hadn’t heard about the term stagflation until very recently. This rise in inflation may not be a short-term phenomenon: the Great Moderation of the past three decades may be over, and we may be entering a new era of Great Stagflationary Instability. Inflation is back, and it is rising sharply, especially over the past year, owing to a mix of both demand and supply factors.
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