Inflation and Deglobalization: Why the Structural Regime Is Shifting

Deglobalization: how the structural disinflationary tailwind of 1990-2020 is reversing — and why the next inflation regime may not look like the one central banks were trained to manage.

Three decades of falling import prices, expanding global supply chains and demographic dividends compressed the structural inflation rate of advanced economies. This pattern is decoded in our reference dossier on inflation. Each of these forces is now reversing — and the post-2022 episode may have been the first warning rather than the last.

The KOF Globalisation Index peaked in 2007 and has stagnated or declined for major advanced economies since (KOF Swiss Economic Institute, 2024). World goods exports as a share of GDP fell from 25.4% in 2008 to 21.9% in 2023 (World Bank). The structural backdrop that made inflation targeting easy is dismantling itself.

The 1990-2020 disinflationary backdrop

The thirty years between 1990 and 2020 represented a unique macroeconomic period. Three structural forces compressed advanced-economy inflation simultaneously: the integration of China into global manufacturing supply chains delivered a sustained import-price compression; the entry of large cohorts of workers into the global labour pool kept wage pressure subdued; and the demographic dividend of working-age population growth in emerging markets supplied capital savings that pushed real interest rates down. The combination produced a structural inflation rate that central banks could anchor close to 2% without exceptional effort. The empirical record is gathered in the inflation regime cartography. It was the easiest inflation environment in postwar history.

The structural quality of that backdrop is what made inflation targeting work as well as it did. Central banks could attribute their success partly to credible policy frameworks, but the deflationary tailwind did much of the work mechanically. The same monetary frameworks would have struggled in the 1970s, and may struggle again as the underlying forces reverse. Our framework on the difference between structural and cyclical inflation develops this distinction.

Three structural forces reversing

The empirical case for a regime shift rests on three measurable reversals. First, trade integration has stalled. World goods exports as a share of GDP peaked at 25.4% in 2008 and fell to 21.9% by 2023 (World Bank, World Development Indicators 2024). Second, demographic momentum has reversed in advanced economies and China simultaneously: the working-age population in advanced economies is projected to decline by approximately 2% between 2020 and 2030 (UN World Population Prospects 2024), with sharper declines in Germany, Japan and Italy. Third, the energy transition has shifted from being a deflationary force (cheap fossil fuels, declining renewable costs) to being a sourced of structural demand for critical minerals: the International Energy Agency projects copper demand to roughly double by 2040, and lithium demand to grow more than fivefold under net-zero scenarios (IEA Critical Minerals Outlook 2024).

Each reversal individually would be modest. The combination is harder to ignore. The post-2022 inflation episode may have been the first regime-test of the new structural environment rather than a one-off pandemic disruption. The pillar piece on the complete framework of inflation mechanisms, measurement, history and effects integrates these structural drivers into the broader cluster.

The KOF Index and the empirical case for deglobalization

The KOF Globalisation Index for the global average peaked at 60.4 in 2007, then stagnated through 2019 and declined slightly during the pandemic (KOF Swiss Economic Institute, 2024 release). The economic-globalisation sub-index — which captures trade flows, FDI, capital openness — shows the most pronounced reversal: a 4-point decline from peak in advanced economies between 2008 and 2023. The political-globalisation sub-index (international treaties, organisation memberships) shows resilience, while the social sub-index (information flows, cultural exchange) continues to rise. The pattern is consistent with selective de-coupling on goods and capital while maintaining information flows.

The ECB and IMF have integrated similar measures into their structural inflation analyses. Aiyar et al. (IMF Staff Discussion Note 23/01) estimated that geoeconomic fragmentation — the formal name for the policy-driven aspect of deglobalization — could raise advanced-economy inflation by 0.4 to 1.2 percentage points over the medium term, depending on the depth of fragmentation. Antràs (2020, “De-globalisation? Global Value Chains in the Post-COVID-19 Age”) provides the academic synthesis. Our analysis of imported inflation channels and external shocks connects to this: as supply chains shorten, the imported-inflation channel changes character, with more domestic substitution and less foreign-exporter price absorption.

Demographic reversal: the Goodhart-Pradhan framework

The demographic dimension is captured most fully by Charles Goodhart and Manoj Pradhan’s 2020 work, The Great Demographic Reversal. Their argument: the integration of approximately 1 billion workers from China and Eastern Europe into the global labour pool between 1990 and 2010 represented the largest positive labour-supply shock in human history, and it depressed wages, inflation, and real interest rates across advanced economies. The reversal of that supply shock — China’s working-age population peaked in 2014 and is now declining, advanced-economy demographic momentum has stalled — should mechanically reverse the wage and price compression that followed.

The empirical signature is visible. U.S. real wage growth for the median worker turned positive in 2023-2024 after a decade of stagnation (BLS Real Earnings series). Eurozone wage settlements in collective bargaining accelerated to multi-decade highs in 2023-2024 (ECB negotiated wages indicator). Japanese spring wage rounds (shunto) in 2024 produced the largest negotiated increases since 1991 at +5.3% (Rengo, March 2024). None of these data points alone proves the Goodhart-Pradhan thesis, but the convergence across geographies suggests a structural shift rather than purely cyclical bounce. Our coverage of wage-price spirals and historical lessons develops the operational implications, while our work on how commodities transmit inflation to monetary policy documents the parallel commodity-side dimension.

Energy transition: a paradoxical new inflationary force

Energy transition was originally framed as a long-term disinflationary force: cheap renewables, declining battery costs, and reduced fossil-fuel dependence. The empirical record so far is more nuanced. Renewable electricity costs have indeed fallen sharply (IEA WEO 2024 reports a 60% decline in utility-scale solar LCOE between 2014 and 2023), but the transition phase has produced its own inflationary pressures: capital-intensive build-out, critical-minerals supply concentration, intermittent renewable output requiring backup capacity, and the political economy of fossil-fuel divestment producing chronic underinvestment in the bridge years.

The minerals dimension is structurally inflationary at the macro level. The IEA Critical Minerals Outlook 2024 projects copper demand for energy-transition uses to roughly double by 2040 against a supply pipeline that lags by 5-10 years; lithium demand to grow more than fivefold under stated policy scenarios; rare-earth element demand for permanent magnets to triple. The geographic concentration of mineral processing (China holds approximately 60-90% of global processing capacity for several critical minerals, IEA 2024) adds geopolitical risk premium to the cost. Our analysis of commodities as macroeconomic regime signals develops the strategic dimension. The more focused work on how Red Sea logistics disruptions feed into inflation provides a concrete recent illustration of the supply-chain vulnerability.

What this means for monetary-policy frameworks

The implications for inflation targeting are substantial. If structural inflation drifts upward, central banks face two unattractive options. Either tighten monetary policy more frequently and more aggressively to defend the existing 2% target — which raises real interest rates, compresses growth, and amplifies fiscal stress — or accept a higher de facto target, with the credibility costs that any visible target shift entails. Several academics (notably Olivier Blanchard) have advocated raising the target to 3% to acknowledge the structural shift; central banks have resisted, but the question will not go away.

The framework challenge also extends to the operational side. Phillips curves estimated on 1990-2020 data may not reproduce in the new regime; pass-through coefficients on imported inflation may rise as supply chains shorten and pricing power of foreign exporters declines; demographic-driven wage rigidities may persist longer. Our examination of the cost-push vs demand-pull diagnostic framework notes that the share of cost-push shocks in any future inflation episode is likely to be structurally higher.

The contrarian case: deglobalization may be exaggerated

The thesis is not without empirical pushback. Trade-in-services has continued to grow even as goods trade plateaued, and the shift toward services may simply represent the next phase of integration rather than reversal. Foreign direct investment flows show resilience in many sectors. The KOF index decline is concentrated in policy-driven measures (tariffs, restrictions) more than in actual flow data. And the demographic story applies primarily to East Asia and Europe; sub-Saharan Africa, South Asia and the Middle East still have substantial working-age population growth ahead, which could partially offset the advanced-economy reversal at the global level.

The honest synthesis: the deflationary tailwind has weakened materially, but a complete reversal to a 1970s-style structural inflation environment is not the central scenario for most analysts. The realistic case is intermediate — structural inflation drifting from 2% toward 2.5-3.0% over the next decade rather than to 5%+. The dataset on U.S. inflation history since 1913 shows that structural inflation regimes have shifted multiple times, with transitions typically taking 5-10 years to fully crystallise.

The diagnostic checklist

For the analyst monitoring the regime transition, four indicators carry the highest signal-to-noise ratio. First, the KOF Globalisation Index trajectory over rolling five-year windows — sustained decline rather than year-to-year noise. Second, the ratio of foreign value-added to domestic manufacturing output (TiVA database, OECD) — declining ratios signal substantive supply-chain repatriation. Third, working-age population growth in major economies — already negative in Germany, Japan, Italy, China; slowing in the US and France. Fourth, critical-minerals price levels and supply concentration — sustained tightness signals structural rather than cyclical pressure.

The deglobalization framework does not predict the timing or magnitude of any future inflation episode. It predicts that the structural baseline against which any episode operates is shifting upward, and that monetary policy faces a harder optimisation problem than during 1990-2020. The pillar piece on inflation mechanisms integrates these structural considerations into the broader inflation framework.

Last updated — 7 May 2026