Will inflation spark a wage-price spiral in 2022? Frying pan to fire…And the hidden crisis of eroding mental health; Plus: Allianz Risk Barometer 2022

It’s being claimed that to be able to ask a question clearly is two-thirds of the way to getting it answered... One of the questions we asked ourselves was how the rising inflation in advanced economies is fueling wage and price levels and where we see room for central banks to maneuver to prevent the amplification spiral. Another question that came to mind was the one on the repercussions of the prevalence of mental health problems such as depression and anxiety in many countries since the beginning of the pandemic. Our report sheds light on the emerging risk mental health, the need to raise awareness and to take action as this evolution comes with huge economic costs. Plus: The latest edition of the Allianz Risk Barometer 2022 - our findings on the most important business risks for the next 12 months and beyond.

Out of the frying pan into the fire: Will inflation spark a wage-price spiral in 2022?

Our latest publication analyzes the “wage-price spiral” in advances economies; the main takeaways are:

Record-high inflation in advanced economies is turning up the heat on central banks. With average wages set to rise significantly in 2022 (+4.7% in the US, +3.5% in the UK, +2.5% in France and Germany), they face a difficult choice: overlooking the overshoot to protect the post-Covid recovery or tightening quickly to stave off a potential wage-price spiral that would add fuel to the fire.

While we expect inflation to recede by 2022 as pandemic-related disruptions ease, if we were to experience sustained rising prices, the UK and France could be most at risk of a wage-price loop materializing in end 2022 and 2023, respectively. We find that, in this risk scenario, the wage-price loop could push inflation up by +3pp in the UK and +1pp in France by end-2023.

In the context of a “cost” inflation time bomb, central banks need to master the timing of their policy actions to prevent the amplification spiral. Even though monetary tightening would have limited impact in tackling supply pressures, it should help alleviate price pressures by taming demand exuberance. In this sense, the Bank of England already started to raise its policy interest rates and will increase rates at least twice in 2022 (cumulative +50bp) to prevent the looming wage-price loop. To avert an inflationary spiral, the Fed is also already dialing back its accommodative stance by speeding up the pace of tapering: three rate hikes at least are expected in 2022. In line with our empirical findings (i.e. the delayed response of wages to price shocks in continental Europe), the ECB appears to be in a position to tolerate some overshoot in inflation and wait longer before acting.

You’ll find our full report here .

Mental Health: Raising awareness and calling to action

Our report sheds light on the emerging risk mental health, the need to raise awareness and to take action as this evolution comes with huge economic costs. The Covid-19 pandemic brought a hidden endemic condition into the light: The share of people who report mental health problems has increased markedly, with the prevalence more than doubling in many countries. Even before Covid-19, depressive and anxiety disorders were among the 10 leading single causes for disability worldwide, with huge economic costs: In the US alone, lost earnings due to serious mental illness amount to around EUR170bn every year and the World Health Organization estimates that the global economy loses about EUR875bn per year in productivity due to depression and anxiety disorders. Now, as a mental health crisis of even bigger dimensions looms, a concerted, two-pronged public private approach – leveraging data-driven and more standardized diagnosis and treatment as well as strengthening prevention – is required to alleviate the social and economic impacts and help the patients concerned. The full report can be accessed here .

Allianz Risk Barometer 2022

The ripple effects of the pandemic and surges in Covid-19 infections have combined with crippling cyber-attacks and extreme weather events to test business resilience and push supply chains to breaking point. Covid-19 continues to cast its shadow but it is a digital pandemic – cyber risk – returning to the top of the rankings (it last held this spot in 2020) that is one of the standout findings of the Allianz Risk Barometer. Find out more about the most important business risks for the next 12 months and beyond, based on the insight of 2,650 risk management experts from 89 countries and territories (and with a little help from your friends at Allianz Research). You’ll find the comprehensive analysis here .