To be sure, if longer-term inflation expectations are rising and no longer anchored, that would change the calculation considerably. In the United States, where the Federal Reserve’s policy changes have far-reaching global effects, the latest Consumer Price Index shows core inflation still above 6%, with service-sector price inflation accelerating. As such, the Fed might see little reason to abandon the tightening path that it has so loudly hinted at.
But the Fed would do well to consider the reduction in real (inflation-adjusted) disposable incomes in the US. Though the decline hasn’t been as severe as in Europe, it has been significant, and the strong tightening of financial conditions may have already sown the seeds for an economic downturn soon.
So, are we heading into a global recession? Much will depend on the Fed, the Chinese leadership, and the erratic, isolated cipher in the Kremlin.
Jim O’Neill, a former chairman of Goldman Sachs Asset Management and a former U.K. treasury minister, is a member of the Pan-European Commission on Health and Sustainable Development.