The True Nature of Inflation Draining Our Wallets

The Ghosts of Inflation: Past, Present, and Future

• The specific causes of the ‘perfect storm’ inflation that struck the 2020s
• The potential risks that massive government debt poses to future price stability
• How new economic variables like deglobalization and AI will reshape the future of inflation

Dissecting the Inflation Storm of the 2020s: What Hit Us?

In 2021 and 2022, we all shared similar experiences. Every week at the grocery store, we were shocked by soaring food prices and sighed as fuel prices on gas station signs climbed steeply. The word inflation was no longer just an economic textbook concept but a painful reality threatening all our wallets.

Where did this massive wave of inflation come from? Was it a one-off event caused by the pandemic, or the dawn of a new economic era? To answer this, we must look beyond simple supply chain issues or government spending. We need to understand how major structural changes like deglobalization (Slowbalisation), green transition, and the rise of artificial intelligence (AI) are rewriting the rules of inflation for the next decade.

Perfect Storm: When Supply Chains Break and Demand Explodes

Before 2020, the global economy operated on tightly connected global supply chains under the principle of ‘Just-in-Time’ production. But COVID-19 shattered this intricate system overnight.

Supply Shock – Collapse of a Fragile System

Lockdowns triggered a cascading breakdown. Factories in Asia shut down, shipping container shortages emerged, and countless cargo ships waited indefinitely outside major ports. The most dramatic example was the semiconductor shortage.

A shortage of chips costing just a few dollars halted car factories worldwide, leading to new car shortages and soaring used car prices. This single item’s price surge significantly pushed up the overall consumer price index. From home appliances to building materials, this was a global phenomenon affecting everything.

Demand Hose – Money in Pockets, But Few Places to Spend

While supply was paralyzed, governments, especially in the U.S., injected massive fiscal stimulus directly into households to prevent a Great Depression.

The problem was people had few places to spend this money. With travel and dining services shut down, huge liquidity funneled into a narrow channel of ‘durable goods’ all at once. This collided head-on with broken supply chains, creating the textbook case of ’too much money chasing too few goods.’

Energy as a Variable – From Sparks to a Massive Blaze

Just as the initial supply-demand shock peaked, Russia’s invasion of Ukraine in early 2022 ignited a global energy crisis. Soaring oil and natural gas prices raised costs for manufacturing and transportation and even affected fertilizer production, driving food prices higher.

Why Was ‘Transitory’ the Most Expensive Word of 2021?

At first, central banks, especially the U.S. Federal Reserve (Fed), labeled the inflation surge as ’transitory.’ Their economic models, shaped by decades of low inflation, predicted supply chains would soon recover.

But by late 2021, as inflation proved far more persistent, one of the most dramatic policy shifts in modern economic history began. The Fed started raising interest rates at the fastest pace in 40 years, pushing the benchmark rate from near 0% to over 5% in a flash. This was a decisive move to prevent entrenched high inflation expectations from taking root, even at the risk of recession.

The Government’s Bill: Is National Debt the Next Inflation Time Bomb?

Fiscal responses to COVID-19 were essential to prevent deeper crises but left governments with massive debt bills.

The Scale of the Problem: A Mountain of Global Debt

The U.S. implemented about $5.1 trillion in stimulus, roughly 23% of its GDP before the pandemic. South Korea’s national debt is projected to rise from under 700 trillion won pre-pandemic to 1,175 trillion won by 2024. This is a systemic phenomenon across major economies.

General Government Gross Debt to GDP Ratio Changes

The Risk of ‘Fiscal Dominance’: When Central Banks Become Treasury’s Servants

‘Fiscal dominance’ refers to a situation where the central bank is pressured to keep interest rates low so the government can manage its huge debt. It’s like an individual with too much credit card debt who must keep borrowing at low rates to pay interest. The central bank becomes less an inflation fighter and more a government ‘interest manager.’

If raising rates to curb inflation spikes interest payments and creates budget holes, the central bank faces enormous political pressure to abandon its core mission of price stability. Even the perception that the central bank is no longer independent can destabilize inflation expectations and make price control much harder.

Spotlight: South Korea’s Dilemma – Caught Between a Rock and a Hard Place

South Korea faces a unique and acute version of this policy conflict. The Bank of Korea must worry not only about government debt but also record-high household debt deeply intertwined with the real estate market.

If the Bank of Korea aggressively raises rates to tame inflation, it risks triggering a wave of household defaults and a real estate market collapse. Conversely, keeping rates low to protect debtors risks letting inflation spiral out of control. While similar dilemmas exist in other advanced economies like Canada and Australia, South Korea’s unique housing finance structure, including the jeonse lease system, adds extra complexity.

The New Economic Frontier: Growth, Technology, and the Future of Prices

The End of an Era? From ‘Great Stability’ to ‘Great Volatility’

For the past 30 years, the global economy enjoyed stable prices thanks to strong disinflationary forces from globalization and technological progress. But these forces are now weakening or reversing, creating structural inflation pressures.

• Slowbalisation and Protectionism: Geopolitical tensions make firms prioritize security over cost, inherently inflationary.
• Demographics: Aging populations in advanced economies and slowing labor supply in emerging markets push wages upward.
• Decarbonization: The green energy transition is essential but likely to cause inflation through massive investments and higher energy costs in the medium term.

The AI Paradox: Inflation’s Savior or New Villain?

AI as a Deflationary Hero

AI has the potential to dramatically boost productivity across the economy, a classic formula for non-inflationary growth. Many digital services have near-zero marginal costs with AI models, which can drive prices down broadly.

AI as an Inflationary Villain

However, AI is incredibly energy-intensive. Training large language models and running data centers consume vast amounts of electricity. This surge in power demand strains grids and could become a new, powerful source of cost-push inflation by raising everyone’s electricity bills.

Lessons from the ‘Lost Decade’: What Japan Teaches Us

While the world worries about inflation, Japan reminds us of the terrifying black hole of deflation. The key lesson is that once deflationary expectations and low growth become entrenched, breaking free is extremely difficult.

Japan has recently experienced inflation consistently above its 2% target for the first time in decades, but whether this marks a true escape from deflationary mindset remains uncertain.

Conclusion

We have moved from a predictable low-inflation world through the 2020s ‘perfect storm’ to a changed landscape shaped by high government debt and new structural forces.

Key Takeaways

1. 2020s inflation was a perfect storm of supply chain collapse, demand surge from fiscal stimulus, and an energy crisis.
2. Surging government debt threatens central bank independence and complicates price stability through the risk of fiscal dominance.
3. Future inflation will be shaped by a tug-of-war between structural inflation pressures like deglobalization and green transition, and powerful deflationary technology like AI.

It is time to move beyond asking “Will inflation come?” to wiser questions: “What kind of inflation will hit which sectors?” and “How will policymakers navigate the new trade-offs between high debt and technological disruption?” Understanding these complex interactions will be the essential skill for navigating our financial lives over the next decade.

(Related article: Timing Interest Rate Hikes and Investment Strategies to Protect Your Assets)