The U.S. may be heading into an “era” in which inflation remains significantly higher on average over the next decade, according to London-based research firm Capital Economics.
In a note this week, John Higgins, its chief markets economist, puts a new spin on the inflation debate, by theorizing that price gains won’t necessarily climb sharply from here, or be accompanied by weaker economic growth and tighter monetary policy. In that case, he says, markets won’t falter the way they have during past periods of high inflation.
The prospect of persistently higher inflation worldwide is gaining traction after the heads of the Federal Reserve, European Central Bank, Bank of England and Bank of Japan acknowledged on Wednesday that the spike in price gains seen in many advanced countries this year may stay elevated for some time. Over the past week, worries about inflation and the prospect that the Fed might need to tighten monetary policy more aggressively down the road were factors behind the runup in Treasury yields, which caused stocks to falter and the U.S. Dollar Index to spike.
A crackdown on the energy sector in China, record energy prices in Europe and cargo pile-ups at California ports are some of the events that have once-complacent investors considering the notion of longer-lived priced gains, even if they haven’t been fully priced in yet. The forecast from Capital Economics goes further out than most firms’ expectations, while delving into the impact on bonds, stocks and currencies.
‘A perfect storm’: supply chain crisis could blow world economy off course
From Liverpool to LA, shortages of energy, labour and transport are threatening recovery from Covid
It was all going so well. Successful vaccination programmes were driving the post-pandemic recovery of the global economy, stock markets were back at record highs, and prices were rising just enough to make deflation fears a thing of the past.
But a supply crunch that initially put a question mark over the availability of luxury cars or whether there would be enough PlayStations under our Christmas trees is instead morphing into a full-blown crisis featuring a shortage of energy, labour and transport from Liverpool to Los Angeles, and from Qingdao to Queensland.
All the problems are in one way or another tangled up in the surge of post-pandemic consumer demand, but taken together they threaten what one leading economist calls a “stagflationary wind” that could blow the global economy off course.