Outside of the geopolitical arena, inflation continues to be the No. 1 problem for the global economy today. Among lower-income households, the rise in the cost of both food and energy is acting as a highly regressive tax on consumption, and the policy medicine to combat it is already causing more uncertainty and volatility in financial markets, which is in turn affecting the higher-income households as well. At the corporate level, managers are struggling to assess how to react to the higher prices—i.e., should they build inventories, raise prices, and/or undertake new capital expenditure, or just wait it out? As a result, lowering inflation should continue to be the top priority for policymakers. Yet, doing so without “breaking something” in the financial markets and the real economy is tricky, and the risks are unfortunately higher than any of us would like.
In light of the ongoing inflation problem, in this Economics Weekly we once again look at current inflation dynamics, with the view that inflation has likely reached its peak in the current quarter and that it will continue to decelerate over the coming quarters, even though the speed at which it decelerates will not be as fast as previously anticipated.
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Richard de Chazal, CFA, is a London-based macroeconomist covering the U.S. economy and financial markets.