Wall Street Journal: Inflation victory is proving elusive, challenging central banks and markets
The decline in inflation from highs of around 9% to 10% across advanced economies in 2022 represent the easy gains, as supply-chain blockages eased and commodity prices, especially for energy, normalized, the newspaper said.
The “last mile” is proving tougher. Underlying inflation, which excludes volatile food and energy prices, slowed to 3% in the second half of last year across advanced economies but has since moved up to 3.5%, according to JP Morgan estimates.
Economists’ and central banks’ forecasts of sustained falling inflation depend on “strong gravitational forces that are not yet validated in global labor costs, short-term expectations, or in recent signals from commodity markets,” JP Morgan wrote in a note. Services inflation remains elevated while goods prices, which had fallen last year, are now moving higher, it noted.
That is forcing investors to rethink bets that inflation would steadily decline to central banks’ targets, generally around 2%. There are even concerns it could surge again, the newspaper said.
On Friday, the US Commerce Department reported that the price index of personal-consumption expenditures, the Fed’s preferred indicator of inflation, rose a relatively tame 2.5% in the 12 months through February, up modestly from 2.4% in January. Beneath the surface, the trend was less comforting. The index excluding food and energy climbed by 3.5% on an annualized basis in the three months through February, up from around 2% late last year.
The Wall Street Journal quoted Fed Chair Jerome Powell as saying on Friday that inflation is on a sometimes bumpy path toward 2%, and strong economic growth allows policymakers to wait. “Is progress on inflation going to slow for more than two months We’re just going to have to let the data tell us that,” Powell said.
Joachim Nagel, president of Germanys Bundesbank and a member of the European Central Bank’s rate-setting committee said in late February that underlying inflation in the eurozone was still 2 percentage points higher than its 1999 to 2019 average.
“If we reduce interest rates too early or too sharply, we run the risk of missing our target,” and might need to raise interest rates again, the Wall Street Journal quoted Nagel as saying. He highlighted a recent International Monetary Fund report that found four out of every 10 inflation shocks since the 1970s had yet to be overcome even after five years.
The newspaper pointed out that central banks themselves may be inadvertently adding to inflation pressure. By signaling a pivot toward interest-rate cuts last fall, they pushed global borrowing costs down and asset prices up, supporting spending.
Some factors favor inflation declining further. In both the US and Europe, a surge of immigration could help keep a lid on wage increases, it added.
Higher government spending on defense and green energy, and geopolitical tensions that crimp global trade, are likely to pressure central banks to tolerate higher inflation over the coming years, according to a Brookings Institution paper published in March.
“A strengthening of central bank independence combined with a more credible public debt policy is likely needed,” said the paper, by economist Kenneth Rogoff of Harvard University and three co-authors.
If central banks react to stubborn inflation by backing away from rate cuts, that would put pressure on both heavily indebted governments and employers. That could test central banks’ will to finish the last mile and push inflation all the way to target, the newspaper said.
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