Financial markets’ gyrations over the recent past have been dominated by shifting views over global monetary policies – with many central banks changing their guidance, sometimes abruptly – as inflation realities have proven to be more daunting than previously expected.
Inflation worries, and hence arguments for tighter policies, revolve around the i) lacklustre response of labour market participation and its impact on wages (subsequently, wage-price spiral), ii) sustained change in goods price inflation, reflecting the permanent shift in labour wages towards lower income consumers, iii) real estate prices and rents, and iv) supply-side shocks (energy, commodities).
Conversely, others highlight the implications of a sharp turn in both the credit and fiscal impulse, notwithstanding the impact of tighter monetary policy.
“First Fed Hike In March – It’s Not About Current Inflation”, https://blogs.tslombard.com/feds-rate-hike-march-2022
“US Inflation – It’s Not About The Rent”, https://blogs.tslombard.com/us-inflation-its-not-about-the-rent
“Vikings At The Gate”, https://themacrocompass.substack.com/p/vikings
We, however, like to re-focus back to more secular drivers of the economy.
Contrary to some commentaries which suggests that inflation will be more elevated due to lower global savings, recent times actually saw a rebound in global imbalances. This reflects both the choice of policy responses (mostly supply-side subsidies) and the limited domestic income rebalancing seen in most surplus economies, and the rise in terms-of-trade of commodity producers, both reflected in rising current account surpluses.
“Global Savings Glut: Structural Headwinds for Yields”, https://www.variantperception.com/2022/01/15/global-savings-glut-structural-headwinds-for-yields/
“China’s record trade gap a symptom of struggle to rebalance its economy”, https://www.ft.com/content/a38c83c2-4e1a-45dd-8558-9ff25bd870c8
Further, as Ryan Avent argued, many of the impediments weighing on the global economy pre-Pandemic remains broadly in place. Income disparity remains high with fiscal transfers having peaked. The world will likely remain mired by excess capacity and savings as supply shortages ease. Monetary policy, despite the shift towards AIT, lacks a credible bias towards employment and growth. The fiscal impulse will turn, sharply in some countries, negative in the coming years with income transfers enacted during the pandemic being phased out.
“The big picture on inflation”, https://ryanavent.substack.com/p/the-big-picture-on-inflation
“The Fed looks increasingly determined to make a major policy error”, https://ryanavent.substack.com/p/the-fed-looks-increasingly-determined
In a previous article, we have sought to explicitly identify the conditions that are critical for the global economy to achieve sustainable escape velocity. The global economy has yet to settle on a particular trajectory but appears likely to shift towards its secular stagnation phase, reflecting tighter fiscal and monetary policy amidst limited enactment of structural reforms required for lift-off:
“Contemplating Investment Regimes (Part II) – Conditions that will lead to a Change in the Global Growth/Inflation Regime”, http://www.theasianhedgehogandthefox.com/?p=186
Curated Reads (Jan 2022) – Revisiting the secular amidst cyclical flux and monetary policy uncertainties
