After a rare, prolonged pause in hostilities, global inflation has resumed battle, and central bank credibility isn't winning the battle. The world has altered, with significant ramifications for financial assets everywhere, whether or not the world's monetary guardians are able to launch an effective counterattack.
US consumer price inflation is at 8.2% as of the writing of this article. The Eurozone has a rate of 9.9%, and the UK has a scorching 10.1%. Even in Japan, where deflation had previously been the accepted norm, consumer prices are growing by 3.0%.
It is sobering to consider that from 1994 to 2021, prices in the US and Europe, excluding gasoline and food, never once managed to increase by more than 3%.
For a significant portion of that lengthy time, central bankers were praised for their magician-like control over the global markets and were thought to possess nearly supernatural talents. Every indication was that they were delighted by the praise.
The "irrational exuberance" of investors was all that was necessary for former Federal Reserve Chair Alan Greenspan to halt the advance of the bull market in stocks. Market participants were certain that rates would increase next month when former president of the European Central Bank Jean-Claude Trichet declared himself to be "very attentive." Accordingly, they responded. Mario Draghi, his successor, ended a sovereign debt crisis that threatened to destroy the Eurozone in 2012 by simply promising investors he would do "whatever it takes" to preserve the single currency.
He had their trust, undoubtedly. That reputation was largely based on central bankers' ability to control inflation, which was the political and economic scourge of the 1970s and 1980s. It turns out that targeting inflation was extraordinarily easy.
A torrent of low-cost commodities entered the world as a result of the expansion of export-oriented economies in China, South America, and more broadly throughout Asia. Information technology and containerized transit have changed shipping. Thus, those things might be delivered to customers at a previously unheard-of speed and reduced price.
Furthermore, developed-market central bankers had the freedom to employ strategies that, in any other circumstance, would have been very inflationary, all without even posing a danger to, much less missing, those important inflation targets.
So much was made possible by inflation's protracted, blissful docility, from the trillions of dollars in quantitative easing implemented after the financial crisis of 2008 to Draghi's magnificent promise.
Modern central bankers are compelled to be a more modest type. Initial Fed predictions that inflation would be "transitory" haven't held up very well over time. A 0.75 percentage point increase in interest rates was once confidently predicted to be "not on the table," but Chair Jerome Powell has had to retract that prediction and, well, put one firmly on it. Last November, the Bank of England seemed certain that it would raise interest rates, but it later wavered and shocked the markets by doing so a month later. In June, following the governing council's regular meeting, ECB President Christine Lagarde had to call an urgent meeting in Frankfurt to tackle speculative attacks on the Eurozone bond market.
0 Comments