Are the structural headwinds to inflation fading?

The past few decades have been marked by a combination of sustained disinflationary forces, but the picture in more recent years, and particularly since the pandemic, looks more mixed. Globalisation and the latest wave of technological progress are putting less downward pressure on prices than in previous decades, but at the same time, weak union power and the continued trend towards flexible labour markets mean the risks of wage-price spirals still look low. The key threat in our view is whether policymakers’ commitment to low inflation has begun to weaken, with those risks greatest in the US.
Michael Pearce Senior US Economist
Continue reading

More from

CE Spotlight

The rebirth of inflation?

The debate over inflation has become polarised between those who expect a return to the 1970s and those who believe inflation is still dead. The reality is more nuanced and inflation outcomes are likely to vary between countries. A new era of higher inflation is most likely to emerge in the US and perhaps the UK. But we think inflation will remain extremely low in the euro-zone, Japan and China. In those countries where we anticipate a sustained rise in inflation, the most likely outcome is that it increases to moderately higher rates of 3-4%. But risks are generally skewed to the upside and there is a real possibility that inflation increases to a much higher rate that would, in time, necessitate a more substantial tightening of policy.

30 September 2021

CE Spotlight

What would an era of higher inflation mean for currencies?

We think that a return to a regime of higher and less stable inflation in many major economies would result in a rise in exchange rate volatility and, over time, the depreciation of the currencies of those countries which experience higher inflation.

30 September 2021

CE Spotlight

What would an era of higher inflation mean for markets?

We expect underlying inflation in the US to be significantly higher over the next decade on average than it has been over the last one. Nonetheless, we don’t think that it will climb sharply from here, or that it will coincide with much weaker economic growth or tighter monetary policy. So, in our view, markets will not falter in the way that they did during some periods of high inflation in the past.

29 September 2021

More from Michael Pearce

US Economics Weekly

Inflation peaking; growing chance of earlier taper

While the July inflation data this week added to signs that we’re past the peak of “transitory” gains in prices for used autos and reopening services, the pick-up in some of the more cyclically driven components showed underlying inflationary pressures are still building. Elsewhere, the hawkish chatter from many Fed officials this week suggests a growing chance the Fed will begin tapering its asset purchases this year.

13 August 2021

US Economics Focus

Labour shortages will last well into 2022

The widespread labour shortages evident in the survey data and job opening & quit rates are only partly due to transitory factors, including enhanced unemployment benefits, childcare constraints, and virus fears. Limited international migration, the wave of retirements and mismatches in the labour market appear to be playing a bigger role and will last well into 2022. That will put sustained upward pressure on wages, which is a key reason why we expect core inflation will average 2.5% over the coming years.

29 June 2021

US Economics Weekly

Lasting price pressures building

The continued surge in prices last month was again mostly concentrated in sectors reopening or facing intense supply constraints, which allows the Fed to stick with its “largely transitory” story for now. But with signs of cyclical price pressures building and the extremely strong job openings and quits figures pointing to stronger wage pressures, we believe the Fed will eventually have to acknowledge that inflation will remain elevated for much longer.

11 June 2021
↑ Back to top