The flipside of markets’ optimism is their vulnerability to central bankers’ hawkishness. If inflation does not fall as they expect, interest rates will stay high or rise further. Have investors got carried away?
But when will it come to an end? A large number of investors and analysts think the answer could be soon. Central banks, in contrast, worry that wage growth remains too high to declare victory. If the dispute is resolved in central bankers’ favour, it could cause upheaval in the markets. And either way, it raises intriguing questions about how best to predict inflation.countries for which there is monthly data, headline inflation is falling. Good news has been rolling in for months .
Financial markets are celebrating. Unexpectedly low inflation should mean there is less need for central banks to raise interest rates. It should also allow them to prioritise economic growth—ie, make them more willing to cut rates when necessary to see off a downturn. Thus, lower inflation makes a fabled “soft landing”, in which a full cycle of interest-rate rises does not lead to a recession, more likely.
America’s enormous appetite for imports overwhelmed the world’s supply chains, which were in any case operating less efficiently because of disease-prevention measures and factory shutdowns. Production delays and shortages of crucial inputs such as microchips caused goods inflation to spill over to much of the rest of the world. Then, over time, inflation broadened out, into rents, wages and reopening service industries.
The puzzling thing is that the economic slowdown is not visible in labour markets, in which competition for workers remains fierce. Six members of the7, a club of big, rich countries, enjoy an unemployment rate at or close to the lowest seen this century . Yet this sort of “immaculate disinflation” is possible, claim one group of economists: those who study money. In 2020 they were among the few to worry about a burst of inflation. Today they are among the most open to the idea that inflation—of both prices and wages—could go away relatively painlessly.
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