According to a report on the website of The German newspaper Handelsblatt on April 18, the world economy is facing one crisis after another. First came the impact of COVID-19, then the russia-Ukraine war and soaring energy prices weighed on the economy. Both have held back economic growth, but with one difference: prices have fallen during the coronavirus pandemic; Inflation is now at its highest level in years.

So stagflation is back. Stagflation is feared because, in dealing with it, the objectives of monetary and fiscal policy clash: measures to stimulate growth fuel inflation; Efforts to curb price rises will weigh on the economy.

Germany is already in stagflation: its economy grew at almost zero in March, but inflation hit 7.3%, its highest level in 40 years. The latest European Central Bank minutes also speak of a "stagflation shock".

The key question is: will stagflation last? If so, how long will it last?

"The threat of stagflation is real," said Nouriel Roubini, a US economist and professor at New York University. Some economists predict stagflation could last a decade. How true is that?

War may bring globalisation to a halt

A wholesale severing of economic ties with Russia would not be hard on its own, but doing so could hamper other emerging countries' integration with world markets.

The Kiel Institute for The World Economy and the Austrian Institute for Economic Research have calculated that if some emerging countries were to leave the international trading system, growth would be severely stunted on both sides.

The economy of the Western Value community will shrink by 1.3 percent, or $700 billion a year.

At the same time, the advantage of international division of labor will also disappear, which will lead to the rise in manufacturing costs and prices of many goods. Vincent Stammer, a trade economist at the Kiel Institute for The World Economy, believes it could take more than a decade to undo the damage.

The World Trade Organization has also warned of such a scenario, cutting its forecast for growth in the volume of global goods trade this year by almost half.

The case against: There is no sign of large-scale decoupling yet, with emerging countries' exports growing despite the war in Ukraine. Although some governments have worked for years to repatriate as much of the value chain as possible, emerging economies remain heavily dependent on international trade.

The demographic transition stunts growth and pushes up inflation

Almost the entire Western world is facing a demographic transition, with Germany particularly affected. From 2025, Germany's working population will gradually shrink. With productivity rising only slowly over the years, technological progress has not made up for the loss of the working population. This is clearly reflected in future trends in production potential. Productive potential is the amount of the economy that can be created under normal conditions with available Labour and machinery.

A shrinking Labour force could also push inflation higher. "This is the basis for a prolonged stagflation environment," said Timo Wolmerhauser, director of macroeconomics at ifO Munich. He thinks the risk is high.

The fewer workers there are, the more competition there is for them: wages paid to them rise, pushing up inflation. At the same time, retirees will have to pay more, which is another factor driving up prices.

Argument against: The jury is still out on whether aging is driving up inflation. In addition, measures can be taken, such as attracting immigrants, to stem the decline in the Labour force.

A wage-price spiral may have begun

The current high inflation rate has prompted calls for higher wages. Larry Summers, the former US Treasury secretary, warned that this could exacerbate stagflation. If companies raise prices because higher wages lead to higher costs, that in turn leads to demands for higher wages. This creates an uncontrollable wage-price spiral.

Summers and Alex Domash, a Harvard academic, recently testified that wage pressures in the US Labour market are as great now as they were when the unemployment rate was at 2 per cent, compared with nearly 4 per cent now.

In its latest minutes, the ECB said "persistently high and higher-than-expected inflation" was fuelling fears of a wage-price spiral. The effects can last a long time and even accelerate.

At the same time, persistent inflation has undermined price signalling. If companies and consumers do not know the approximate cost of a product in the coming months, that will discourage effective action and thus restrain economic growth.

The case against: So far, German unions have been cautious about workers' demands for higher wages. Economic researchers predict wage increases won't even make up for inflation over the next two years.

Protecting the climate could hurt economic growth

Saving the climate requires direct price increases, especially through carbon pricing. Moreover, the impact on energy prices from the war in Ukraine will have a general impact on inflation.

At the same time, increased use of renewable energy will lower energy prices.

Predictably, protecting the climate can hurt economic growth. If climate targets are to be met, lots of climate-friendly machinery, houses and cars will have to be bought - and in many cases those that have not yet reached the end of their useful lives will have to be replaced.

If climate targets were met through these alternative investments alone, all else being equal, economic output in 2030 would be fully 15 percent lower than in 2021, according to a joint economic forecast by Germany's leading economic institutes.

The argument against: Protecting the climate won't shrink the economy if technological advances are large enough to save significant amounts of energy. The historical rate of progress in energy-saving technologies is 2.7 percent per year. It must rise to 5.6% to meet the 2030 climate target without slowing economic growth, while keeping inflation in check. The stagflation of the 1970s brought hope: thanks to the oil shock, huge improvements were made in energy efficiency.