Hello,
Inflation in the euro zone has just exploded.
Data released this morning showed consumer prices jumped a record 10.7%, beating economists’ expectations and suggesting the wild inflationary ride the world has seen over the past 18 months is a long way off. to be finished.
Is there an end in sight?
One of the themes of this turbulent period is how policymakers and economists underestimated the magnitude and direction of inflation, Deutsche Bank researchers said.
At first, we were assured inflation was “transitional,” driven by global supply chain issues, the Russian-Ukrainian war, and the extraordinary surge in demand from consumers freed from COVID-19 lockdowns. – a call to renowned economist Mohamed El-Erian said it was the worst in the history of the US Federal Reserve.
The tone has changed since then, as inflation turns out to be more rigid than expected and central banks struggle to control prices.
Deutsche said the current global consensus expects us to be back at or even below 3% inflation in two years. The Bank of Canada, in its latest monetary policy report, said it expects inflation to fall to around 3% at the end of 2023 and then back to 2% in 2024.
Are they successful this time around?
“History never repeats itself exactly, but since inflation forecasts have generally been so poor over the past 18 months, it’s worth asking ourselves what normally happens when inflation breaks these thresholds,” Deutsche said.
The bank looked at past periods when inflation spiked in 50 developed and emerging markets and found that once inflation rises above 8% as it did earlier this year, it takes about two years to fall below 6%, before stabilizing around this level. for five years after the initial peak.
“Should we have been so surprised by the stickiness of inflation? History suggests not, because when inflation has already reached levels as high as it is now, it has generally been slow to come down,” the researchers said. “Furthermore, it usually ends up stabilizing at a level well above where it was before the peak of inflation began.”
Central bankers, including Bank of Canada Governor Tiff Macklem and former Fed Chairman Ben Bernanke, have stressed that this current inflation spurt will not be a repeat of past peaks like the one seen in the 1970s because of lessons learned. Central banks now have a clear mandate to keep inflation under control and have responded more forcefully to the threat this time around.
But another Oxford Economics study – Seven Reasons Why Inflation Might Be Here to Stay – offers some interesting insights into how people view inflation and efforts to fight it.
Trust in central banks is a problem. Confidence in banks fell dramatically after the global financial crisis and the European debt crisis, and although it has since recovered, it remains at moderate or low levels in many of Europe’s largest economies. the eurozone, Oxford said. In the United States, less than half of the public thinks the Fed makes decisions that are in the best interest of the average American.
“The fragility of people’s trust in central banks is significant. Evidence suggests that those with a more negative view of their central bank are less receptive to its messages, as their medium-term inflation expectations are less firmly anchored and less in line with the inflation target,” Oxford said.
Support for inflation targets and monetary policy tightening may also be limited. In the Bank of England survey, only 36% agreed with the bank’s goals. More people think they are too low.
A CNBC survey this month found that more people think it is important to “protect jobs, even if costs continue to rise” than to “slowly increase costs, even if unemployment rises”, has said Oxford. Only 30% of respondents to a UK survey believed that interest rate hikes would be best for the UK economy. Half thought rates should be reduced or stay the same.
” That is problematic. Our previous research has shown a general decline in the effectiveness of policy rates in advanced economies over the past few decades. If this were to remain the case, an extremely restrictive monetary policy could be necessary for central banks to bring inflation back to its target. Public support for such a policy appears limited,” Oxford said.
Deutsche said if history or consensus turns out to be correct on inflation, it would have a “profound impact” on financial markets and economies over the next few years.
“If the median through history is correct, then the turmoil of 2022 may turn out to be just the beginning.”
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Canada’s GDP data released on Friday clearly showed an economy in decline, but at least, as one economist put it, it’s still growing.
August’s gross domestic product rose 0.1% as forecasters expected a flat reading, and early estimates from Statistics Canada call for a similar gain in September. That puts Canada’s third-quarter growth rate, estimated at 1.6%, half the pace seen in the first six months of the year, Bloomberg reports.
Is it enough for the Bank of Canada?
Some economists say the Bank raised its rate by 50 basis points last week instead of 75 because it believes the economy is slowing and will continue to do so. In its monetary policy report on Wednesday, the central bank acknowledged a 50/50 chance of a technical recession over the next few quarters.
But few, if any, think the Bank is done with rate hikes just yet.
“The Bank of Canada decided to slow the pace of its rate hikes on Wednesday, as it believes a slowdown in economic growth is ahead. Although it’s starting to show in the data, we think the Bank of Canada will need to keep raising its key rate to 4.25% in order to get enough deceleration to bring inflation down,” said James Orlando, economist Principal at TD Economics. , written in a note.
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Canadian Jesuits International will hold a press conference with Jacques Nzumbu, a Jesuit priest from the Democratic Republic of Congo and specialist in conflict minerals. He will speak about the impact of mining activities in his country and discuss what can be done to ensure that mining companies, including some Canadian ones, adhere to human rights and environmental due diligence.
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Standing Committee on Transport, Infrastructure and Communities Meets on Anticipated Labor Shortages in Canada’s Transportation Sector
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Court hearing of former executives of CannTrust Holdings Inc.
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Ahead of possible expansion in Victoria, UBER is holding an information meeting for potential drivers
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Today’s data: Bloomberg Nanos Trust, Chicago PMI
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Earnings: Fairfax Financial Holdings, IAMGOLD, Brookfield Asset Management, Knight Therapeutics, Turquoise Hill Resources, Park Lawn, Obsidian Energy, Stelco Holdings
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Today’s Posthaste was written by Pamela Heaven, @pamheavenwith additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.
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