Geopolitical risk is tied to inflation

 

Inflation has come down from highs, but prices are still higher than what was seen four years ago. The value of savings has been eroded and if you did not see your wages increase, your purchasing power has declined. In the paper "Geopolitical Shocks and Inflation", the author shows that there is a link between inflation and geopolitical risk and it has gotten stronger over the last two decades.  Geopolitical shocks lead to increases inflation.

The increase in geopolitical risk leads to a decrease in international trade and supply disruption which then is then related to higher public spending, public debt and increases in the money supply.  Geopolitical risk leads inflation which calls for policy responses that create second order effects. If there are supply shocks, there is higher inflation and a GDP drop. The type of policy response will impact the size of the inflation and GDP shock. 

The driver for some of the voting for political change may be associated with the increase in geopolitical risk and inflation. Geopolitical shocks impact inflation which then drives household sentiment.