Why Inflation Looks Likely To Stay Above the Pre-Pandemic Norm
Even as supply-chain snarls ease, wage growth and price expectations are ticking up. The Economist: The bad news on inflation just keeps coming. At more than 9% year on year across the rich world, it has not been this high since the 1980s -- and there have never been so many "inflation surprises," where the data have come in higher than economists' forecasts (see chart in the linked story). This, in turn, is taking a heavy toll on the economy and financial markets. Central banks are raising interest rates and ending bond-buying schemes, crushing equities. Consumer confidence in many places is now even lower than it was in the early days of the covid-19 pandemic. "Real-time" economic indicators of everything from housing activity to manufacturing output suggest that economic growth is slowing sharply. What consumer prices do next is therefore one of the most important questions for the global economy. Many forecasters expect that annual inflation will soon ebb, in part because of last year's sharp increases in commodity prices falling out of the year-on-year comparison. In its latest economic projections the Federal Reserve, for instance, expects annual inflation in America (as measured by the personal-consumption-expenditure index) to fall from 5.2% at the end of this year to 2.6% by the end of 2023. You might be forgiven for not taking these prognostications too seriously. After all, most economists failed to see the inflationary surge coming, and then wrongly predicted it would quickly fade. In a paper published in May, Jeremy Rudd of the Fed made a provocative point: "Our understanding of how the economy works -- as well as our ability to predict the effects of shocks and policy actions -- is in my view no better today than it was in the 1960s." The future path of inflation is, to a great extent, shrouded in uncertainty. Some indicators point to more price pressure to come in the near term. Alternative Macro Signals, a consultancy, runs millions of news articles through a model to construct a "news inflation pressure index." The results, which are more timely than the official inflation figures, measure not just how frequently price pressures are mentioned, but also whether the news flow suggests that pressures are building up. In both America and the euro area the index is still miles above 50, indicating that pressures are continuing to build. Inflation worry-warts can point to three other indicators suggesting that the rich world is unlikely to return to the pre-pandemic norm of low, stable price growth any time soon: rising wage growth, and increases in the inflation expectations of both consumers and companies.
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