Given the latest prints, the inflation peak seems to look more like Kilimanjaro than the Matterhorn. In particular, stubbornly high energy prices are keeping inflation rates high.
Apparently, the latest readings surprised to the upside due to special circumstances at the oil refineries. Granted, our models hardly reacted to this, as they primarily take oil prices into account when gauging the energy impact on inflation. But still, the trajectory of inflation indicates a tedious process of working off the price bulge caused by the major economic shocks of the pandemic and the war in Ukraine. To provide a flavour of how inflation rates could roll over: according to our models, the growth in US consumer prices should fall below 5% by year end and below 3% in twelve months’ time. Sure, this is still above the levels that central banks would like to see in the medium term. This is why markets have become so nervous after every upside surprise in inflation lately.
Playing field has become global
The central bank system seems to be like the taxi industry after the intrusion of ride-hailing services: what used to be local monopolies have now become a globally driven market. Central banks used to reign their home turfs and let currencies work as valves for imbalances between home and abroad. After the most recent shocks, the playing field has become global. The pressure of supply disruptions has washed away most of the independence of policymakers around the world. It started with emerging market central banks stemming against currency outflows. Then the US Federal Reserve made it a reserve currency issue (see ‘number of the week’). After that, the Bank of England folded, as did the European Central Bank last week. It will be interesting to see whether the last ones standing will yield too: the Bank of Japan and the Swiss National Bank are due to report this week.
Conclusion for investors
Given this shift, investors fear a growth collapse will be next. Against this backdrop, we think it is wise to let the tsunami of central bank updates pass this week. It may be too early to be bold, but some opportunities are emerging
Number of the week