Stagflation Warning from the Bank for International Settlements

By Marc Jones
LONDON (Reuters) – Staff at the Bank for International Settlements (BIS) have expressed concerns about the potential for stagflation globally if trade tariffs proposed by soon-to-be U.S. President Donald Trump lead to a stronger dollar.

Stagflation, defined as a combination of high inflation and low economic growth, is seen by economists as a serious threat, impacting consumers and firms simultaneously.

Days ahead of Trump’s inauguration, a BIS report stated that while the global economy is expected to experience a “soft landing,” there is increasing uncertainty due to emerging challenges.

Surveys indicated a growing likelihood of a scenario with robust U.S. economic growth and persistent inflation, which could restrict how much the U.S. and other nations can decrease interest rates.

Concurrently, global trade may encounter heightened “frictions and fragmentation” as the trade conflict between Washington and other nations becomes a tangible risk.

Should the U.S. commit to minimal interest rate cuts, or even increase rates, while other countries are forced to lower theirs, this could result in significant capital flow changes and adjustments in exchange rates.

According to the BIS report, “The value of the U.S. dollar could continue its recent rise due to higher U.S. interest rates, a stronger economy, and considerable political uncertainty.”

As a consequence, stagflationary impacts on the global economy may arise because of the dollar’s central role in trade and international finance.

A stronger dollar generally leads to higher inflation in other countries by raising import prices and inflation expectations, especially in developing nations.

The strength of the dollar also usually tightens financial conditions by escalating global borrowing costs, subsequently limiting real economic activity, particularly in nations with fragile economic foundations and precarious fiscal situations, the BIS noted.