FX.co ★ Risk of global stagflation rises

Strong dollar and high commodity prices are increasing the risk of global stagflation. The Bank for International Settlements said emerging markets suffer the most from this, as indicated by the quarterly data from 22 commodity-importing countries over the past 30 years.

Usually, when commodity prices rise, inflation also surges, which suppresses economic growth. Strengthening dollar leads to a similar scenario; thus, the combination of the two greatly increases the risk of stagflation.

High commodity prices also push the costs of living and production up, as well as undermine debt repayment capacity, which could lead to tighter financial conditions.

Inflation caused by higher commodity prices, meanwhile, can trigger a monetary policy reaction that weakens the real economy. And since commodities are often billed in dollars, a rising dollar exacerbates the problem of stagflation.

A prolonged positive correlation between the two will mean greater challenges for macro-financial stability in the future. This will lead to greater macroeconomic volatility and more difficult trade-offs between output stabilization and inflation.

The Bank for International Settlements said that markets should not rule out a globally synchronized return to higher-than-expected rate levels.