Inflation: the market underestimates the duration of price increases


Global central banks are divided on how long the surge in inflation will last.On Thursday, the UK became the first G7 economy Raise interest rates Since the beginning of the epidemic.The Fed has indicated that it will accelerate the reduction of monthly debt purchases and hinted at plans Raise interest rates More positive in 2022.At the same time, the European Central Bank only Slightly convergent Stimulate.

The problem is to strike a balance between rising consumer price pressure and the potential blow to economic growth from the Omicron coronavirus variant. One camp claims that the increase is driven by supply chain disruption and will prove to be short-lived. Another expects that prices will continue to rise for some time.

In the United States, consumer price increases are close to a 40-year high, and the increases are mainly concentrated in commodities affected by supply constraints and rising demand. Once the supply chain disruption caused by Covid-19 becomes less severe, the shortage of products such as semiconductors will be alleviated.

But treating inflation as “related to the pandemic” will inevitably pass the risk of underestimating the duration of the pandemic. Expect more variants. The Fed admits that this means that inflation is likely to remain high.

Inflation also has psychological factors. If consumers expect prices to continue to rise, they will now try to buy more. This in turn will push up prices. This may eventually spread to wages, causing wage prices to spiral upward. Inflation will self-sustain.

Currently, both the stock and bond markets seem to believe that inflation will ease. The benchmark 10-year U.S. Treasury bond yield was 1.42%, which is still less than half of the 2018 level. But this view underestimates the extent of the structural changes accelerated by the global economy due to the pandemic. The days of low inflation and strong growth are out of reach.

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