Themes of 2021

Reflation, supply chains, China's slowdown, labor markets, living with COVID-19 and bigger government were prominent stories of the year.

Editor’s Note: This week, we look back on the most prominent stories we covered this year. Somehow, we suspect we’ll be talking about them even more in 2022.


For a decade prior to the pandemic, inflation was quiescent. During that time, economies around the world enjoyed very strong growth that brought unemployment down to very low levels. Monetary policy tightened, but money supply growth remained robust. These two factors, which have historically been triggers for higher inflation, proved much less potent.

Secular factors such as keen competition, supply chain efficiencies and e-commerce were credited for keeping a lid on prices. While good for consumers, these elements frustrated central bankers seeking to reach inflation targets. To reinforce their commitment to heading off disinflationary expectations, monetary authorities have changed their operating principles over the past several years to allow inflation to run high after long periods of running below target. Those new principles are being sternly tested, much sooner than anticipated.

Weekly Economic Commentary - Chart 1

When inflation began to surge as the economy reopened in 2020, it was easily dismissed as fleeting. Only a handful of categories were stressed. Demand had been boosted by stimulus, but supply would certainly rise to the occasion. Eighteen months later, the supply of goods and labor still has not fully responded; inflation has broadened and increased. The Chairman of the Federal Reserve conceded recently that it was time to retire the word “transitory” when describing the current condition.

The changing calculus around the price level was arguably the most significant economic story of the year. Assumptions made by businesses about costs and by investors about real returns are undergoing important recalibration. And major central banks are scurrying to change their timelines for removing policy accommodation: the Bank of England is likely to raise its interest rates within the next few months, while we now expect the Fed to follow at midyear 2022.

Our global forecast for the new year anticipates that inflation will settle over the coming quarters as supply chains unkink and idle workers return to the labor force. As well, the secular forces which were so powerful in the last decade should eventually reassert themselves. But the risks to inflation seem aligned to the upside, which could land this topic back on the top stories list twelve months from now.