How much is too much? Inflation’s costs and benefits

A period of moderately higher inflation could be a good thing for many economies, but there is a risk that policymakers become too accepting of the situation. We judge that the costs of higher inflation would start to outweigh the benefits in advanced economies if rates of more than about 5% were sustained.
David Oxley Senior Europe Economist
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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

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Nordic & Swiss Economics Update

“QT” creeping up the agenda in Sweden

The Riksbank stuck firmly to “Plan A” this morning by maintaining the status quo for the repo rate and its asset purchase programme. However, the slight tweak to the Bank’s language on the outlook for the balance sheet lends support to our view that policymakers will allow it to shrink by the end of next year.

21 September 2021

Nordic & Swiss Economics Update

Switzerland and Nordics to sidestep gas price woes

The low use of gas, and a reliance on nuclear and renewables for electricity generation, means that Switzerland and the Nordics are less exposed to the recent surge in gas prices than other parts of Europe – particularly Spain.

20 September 2021

Nordic & Swiss Economics Weekly

Monetary policy decisions, served three ways

After months of anticipation, the Norges Bank will surely pull the trigger on its long-awaited tightening cycle next Thursday. We suspect that policymakers will portray the rate rise as a “dovish hike”, but we still forecast the Bank to raise rates by another 25bp in December, and by a bit more than investors expect next year. Elsewhere, both the Riksbank and SNB will leave their policy rates on hold next week, but we think there is a good chance that Swedish policymakers will open the door to shrinking the balance sheet next year.

17 September 2021
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