What surprise awaits us this year? Hope you're not tired of the I-word yet.
Hi, it’s Enda. The champagne is barely flat from the weekend’s parties, but economists are looking ahead to 2023’s surprises. And there is no topic more contested—and crucial—than inflation.
More than geopolitics, the question of inflation has taken on a degree of urgency after forecasts through much of last year were shredded as prices raced away and policymakers scrambled to respond. The end result has been a global economy on the brink of recession. Swiss bank UBS has forecast world growth of 2.1% this year, the eighth-weakest year since the late 1960s.
One argument gaining traction is that last year’s rapid price gains will turn to disinflation, if not outright deflation, sooner than expected as global growth slows and energy and food prices fall. Rising unemployment will keep a lid on wage gains.
There’s scattered evidence in support of that theory. Turkish inflation in December decelerated at its steepest pace in more than a quarter century. Prices in UK stores dipped in December, marking the first decline in over a year. Both French and German inflation slowed more than anticipated in the same month.
In energy markets, natural gas prices are plunging after a warmer than expected start to winter. US benchmark prices dropped as much as 12% on Tuesday to fall below $4 per million British thermal units for the first time since February. West Texas Intermediate oil fell toward $76 a barrel after sinking 4.2% on Tuesday in the biggest drop since November.
If these developments hold, it could see forecasts for slower inflation get revised lower—again.
Global CPI peaked at 9.8% in the third quarter of last year and is on a path to end this year at 5.3% as growth slows, according to Bloomberg Economics.
Analysts at JPMorgan Chase & Co. estimated in December that inflation will slide substantially this year, even if that decline is incomplete. They expect core inflation in the US and euro zone will fall well short of central bank expectations.
Policymakers are signaling slower price gains. Israel’s central bank on Jan. 1 raised interest rates to their highest level since 2008 and signaled they’ll remain elevated for some time. Yet central bank governor Amir Yaron expects prices to come off in the second half of the year.
“We will still see inflation on an annual basis going up in the next two months,” Yaron said in an interview with Bloomberg Television this week. “But then afterward modestly declining and then even more so declining in the second half of 2023 into the target rate.”
Much slower than expected inflation would take the steam out of the most aggressive cycle of interest rate hikes in 40 years, with knock on consequences for consumers, real estate and business confidence, and for views that the world is headed for a deep recession.
To be clear, it’s too early to call a definitive path for inflation and the direction will vary by economy. Neither have central banks yet reached their comfort zone.
In the US, for example, unless there’s a major surprise, payrolls data on Friday is expected to show resilience justifying the argument by Fed officials that it’s too early to talk of a monetary policy pivot.
Skeptics are also warning against calling an end to the inflation cycle. Scion Asset Management founder Michael Burry warned that while inflation has peaked, it’s likely to accelerate due to government spending.
“The US in recession by any definition,” Burry, the investor made famous by Christian Bale in the 2015 movie The Big Short, wrote on Twitter late Sunday. “Fed will cut and government will stimulate. And we will have another inflation spike. It’s not hard.”
Still, if 2022 offers any lessons it’s that inflation can shock—in either direction.
Albert Edwards of Societe Generale is among those flagging the risk of a big collapse in headline inflation amid recession risk and falling commodity prices, though he warns that could merely set up a second wave of inflation akin to the 1970s.
Others say the transitory crowd may ultimately have their day as powerful structural forces including technology and the enduring impact of globalization will ensure further price gains are slow, according to Stephen Jen, the London-based chief executive of hedge fund Eurizon SLJ Capital Ltd.
“I remain in the camp that believes that global structural inflation will likely remain low,” Jen said. “There could be spurts of wage inflation, which is almost necessary to maintain social stability in the developed world. But how could we expect stable wage inflation and PPI deflation in China not to have an impact on inflation in the West?” —Enda Curran, Bloomberg News, chief Asia economics correspondent
“Not long ago, McDonald’s flagship restaurant in Moscow completed a truly ill-timed remodeling. A powerful brand symbol and tourist draw, Russia’s first location and for many years the world’s busiest, the store opened in busy Pushkin Square in 1990, when the plaza was still Soviet. The flagship stayed resolutely Golden Arch-y for decades, until the company announced in 2020 that it would be modernized to commemorate its 30th anniversary.”
Susan Collins, who made history in July when she became the first Black woman to lead a regional Federal Reserve bank, was a kid spending summers with family in Jamaica when she got some introductory lessons in topics that would reappear throughout her professional career: inequality, foreign-exchange crises and the real-life effects of monetary policy.
By Enda Curran
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