There is considerable policy tightening in the pipeline that will slow the economy. Rising inflation expectations and tight labour markets are feeding wage growth and companies appear able to pass on higher costs, thus maintaining or boosting profit margins.ĭespite criticism, the US Federal Reserve was sensible to pause. However, second-round inflation effects are feeding into core inflation in economies such as the UK. The initial drivers of this global inflation bout have been reversed, namely supply-side factors and lax monetary policies. The persistence of core inflation is keeping central banks in the west cautious. It has seen inflation ease to a 25-month low of 4.25 per cent but policy is on hold. While many countries are likely to have seen policy rates already peak, central banks are reluctant to signal easing. The UN’s measure of food prices is 22.1 per cent below its March 2022 all-time high.Ĭhina, which maintained a prudent monetary policy during the pandemic, has just eased and is likely to cut its reserve requirement ratios for banks again, providing liquidity. Globally, headline inflationary pressures are easing. Tightening through higher policy rates could end soon. One is where rates will peak and whether central banks have done enough to curb inflation. The end of cheap money is the dominant issue, driven by the need to restore anti-inflationary credibility to policy. Markets will need to factor this in fully. Not now, but once we see where core inflation settles. That is, policy rates will need to remain higher than inflation for some time. There needs to be a prolonged period of positive real interest rates in western economies. The writer is chief economic strategist at Netwealth

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