This week, the U.S. is expected to report a 7.3% inflation rate for January, the highest since the early 1980s. Euro-area inflation just hit a record.
Global Shock
As recently as a few months ago, most officials didn’t anticipate the situation they’re now in. They spent much of 2021 arguing that price pressures would prove “transitory.” They welcomed the rapid rebound in employment and dismissed the inflation alarms that some commentators were already sounding.
Now, policy makers have decided that inflation has staying power—and that tolerating it risks setting off an upward spiral of prices and wages, which could prove impossible to halt without provoking a recession.
By acting now to cool things off a bit, they hope to deliver a fabled “soft landing,” instead of a crash.
There are risks in both directions.
Inflation will likely continue to be fanned by declining unemployment and renewed demand for services as economies prove resilient to the omicron variant, according to JPMorgan economists led by Bruce Kasman. “It is hard for us to accept a juxtaposition of sustained low inflation with limited central bank action,” they also said in a report.
Some big-name economists and investors warn that central banks are still “behind the curve” and not fully grasping the scale of measures they’ll have to take.
Ready To Launch
But rapid hikes now could be counterproductive if inflation does start fading as supply chains heal and commodity markets cool. That could leave policy settings suddenly looking too tight—something that happened to the ECB a decade ago.
And if inflation does stick around, it might not be the kind that can be managed with monetary policy.
Strategists at BlackRock Inc. argue that prices are rising faster because of supply problems, and central bankers should learn to live with that. Bloomberg Economics calculates that if the BOE did want to bring inflation down to its 2% target this year, it would have to raise rates by enough to throw 1.2 million people out of work.
For now, the only way is up for global rates—but beyond that, the details are cloudy.
Forecasts diverge widely on how many Fed hikes are coming this year. While Barclays Plc reckons just on three increases, for example, Bank of America expects seven. Also unclear is how big the moves will be, when they’ll be executed and where the benchmark rate will eventually end up.
Central bankers prefer it when their intentions are widely understood. Having made an abrupt policy shift, they need to figure out how to communicate their new plans to investors. Otherwise, markets could be in for a rough ride.
—With assistance from Zoe Schneeweiss and Jeremy Diamond.
This article was provided by Bloomberg News.