Inflation may be peaking, but doubts emerge about its decline

With central banks ratcheting up their response to a global inflation shock, the debate is shifting from when they’ll win the war to whether faster-rising prices are here to stay in a supply-constrained world.

The risks of an emerging era of high inflation have been sketched out by top central bankers, led to a debate about whether current inflation targets may prove ruinously strict, and started shaping the views of corporate officials laying plans for the post-pandemic world, reports Reuters.

Central banks might make some progress toward their inflation targets by raising interest rates and managing demand, Morgan Stanley chief executive James Gorman said at the Reuters NEXT conference in New York. But getting all the way back to the 2 per cent level most have set as their aim may be hard in a world where supply chains, demographics and other challenges will conspire to keep prices higher.

“I suspect inflation will remain higher than people want,” Gorman said. Central banks, by managing demand through interest rates, could probably “bring inflation down to around four per cent. It gets much hard after that. Four to 2 per cent is a pretty significant change” because of supply-side limitations.

Gorman’s comments captured what is likely to be the next stage of debate for central banks and global leaders as they assess how effective their policies have been in controlling prices and what more might have to be done - all in the context of a slowing global economy and possible recession in key areas like Europe.

Inflation is “still very concerning … we started in April with the idea that there would be stagflation and I think that is playing out,” World Bank President David Malpass said in a Reuters NEXT interview, referring to a worst-of-both-worlds combination of stagnating growth and continued inflation.

“We have slow growth. We have inflation stubbornly high. We have the risk of recession in many countries,” Malpass said.

But he also nodded beyond the world’s central banks to a needed supply-side solution to rising prices.

“Where is production going to come from?” he said. “People should be trying to produce more to combat the inflation trends that are going on.”

So far, and particularly in the United States, the actions of central banks have not had an appreciable impact on core elements of the economy, particularly the job market. But they have also not made substantial progress in lowering inflation from current high levels - around 6 per cent in the US, and more than 10 per cent in Europe and the United Kingdom.

It may be peaking. Inflation slowed in Europe in November for the first time in 17 months and has been edging down in the US since June.

In remarks this week, Fed chair Jerome Powell gave his most detailed account yet of forces that may pull inflation down in coming months, including a decline in new rental leases that will eventually pull down the headline averages, and falling goods inflation.

However, officials are aligned that prices are still rising too fast, and increasingly on the idea that solutions will need to be forged beyond monetary policy.