The focus on the day before the US CPI report is released is whether or not we have reached “peak inflation”. Essentially, it’s easy to argue that we’re likely to see weaker inflation readings in the coming months and that may be all the markets are interested in – at least for now.
But in the bigger picture, I think you have to make a distinction about what happens to the inflation outlook after that. A “spike” suggests that we are likely to see inflationary pressures ease back and move closer to the central banks’ 2% target one way or another (one way or another). However, in all likelihood, we should rather see inflation reaching a “plateau” in my opinion.
There are no easy solutions to global problems to solve the problems that have caused inflationary pressures to skyrocket over the past year. And these problems are not going away just yet.
While it’s plausible to expect less hot inflation numbers going forward, that doesn’t mean we’ll see inflationary pressures diminish significantly.
And that may present as a problem for central banks in the later stages of the year or early next year perhaps.
While it’s easy to raise rates when inflation is high and claim it will eventually come down to 2% one dayit’s not that easy when that one day is increasingly postponed.
At some point, policymakers may have to recognize that inflationary pressures are going to be more persistent and persistent and if they want to try to tackle this further, it may require tighter policy for longer. And in the case of the Fed, that could mean steering the federal funds rate to a higher-than-expected terminal rate.
So, have we seen a spike in warmongering from central banks? Maybe, at least in terms of a price based on “maximum” inflation. But what happens when the markets instead start turning towards an inflation “plateau”? This is going to be an interesting change in perspective and price.
Naturally, economic conditions will also be factored into the equation for central bank policy decisions, but this will test their resolve in trying to defeat the inflation monster. I mean, if the economy crashes while inflation is still high with the fed funds rate at 3% or higher, the Fed will probably have to admit that there must be a policy error somewhere. It will be quite the moment.