Part 1: Inflation – Tall Tales And True Causes

GMO

James Montier, Philip Pilkington

Research

11 Pages

GMO examines the structural drivers of inflation, arguing that the disinflationary forces of the past few decades are reversing as demographics, globalization, and policy trends shift. The authors suggest inflation could settle meaningfully higher than recent norms, challenging assumptions built during a 2% era.

Key Takeaways

Demographic Pressure Rising: Aging populations may reduce labor supply, with working-age growth in major economies slowing toward 0% versus roughly 1–2% historically, adding upward wage pressure.
Globalization Reversal Impact: Trade as a share of global GDP peaked near 60% and is now stagnating, reducing a key disinflationary force that helped suppress prices for over 30 years.
Policy Regime Shift: Fiscal deficits exceeding 10% of GDP during crises signal a willingness for sustained intervention, increasing the probability of structurally higher inflation outcomes.
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