‘Inflation fever’ finally breaking – but central banks won’t stop hiking interest rates

WASHINGTON (BLOOMBERG) – Global inflation is finally coming off the boil, even if it’s set to remain far too hot for the liking of the world’s central bankers.

As economic growth slows, prices for key raw materials – from oil to copper and wheat – have cooled in recent weeks, taking pressure off the cost of manufactured goods and food. And it’s getting cheaper to move those things around, as supply chains slowly recover from the pandemic.

After the worst price shock in decades, the speed at which relief arrives will vary, with Europe in particular still struggling. But for the world as a whole, analysts at JPMorgan Chase & Co estimate that consumer-price inflation will fall to 5.1 per cent in the second half of this year – roughly half of what it was in the six months through June.

“The inflation fever is breaking,” says Bruce Kasman, the bank’s chief economist.

That doesn’t mean an early return to the subdued inflation that much of the world enjoyed before the twin shocks of Covid-19 and the war in Ukraine – or the end of monetary tightening anytime soon.

Fed’s still hiking

Rents and labour-intensive services are likely to keep getting more expensive, with job markets tight and wages on the rise. And there are broader forces at work, from slowing globalisation to lacklustre growth in the labour force, that may keep price pressures bubbling.

The major global central banks, which failed to see the pandemic price shock coming, are set to press ahead with interest rate increases even as headline inflation tops out. The Federal Reserve, European Central Bank and Bank of England are all expected to hike rates again in September.

Fed chair Jerome Powell left the door open to another jumbo 75 basis-point increase next month, telling fellow central bankers in Jackson Hole on Friday that a recent ebbing of US inflation “falls far short” of what policy makers want to see. The following day, ECB Executive Board member Isabel Schnabel said “central banks need to act forcefully.”

Some central banks that were quicker off the mark than the Fed to raise rates may take advantage of cooling price pressures to pause their tightening moves.

The Czech National Bank this month left policy unchanged while the Brazilian central bank is expected to do the same in September. And New Zealand’s Reserve Bank may be nearing the end of its aggressive moves, Governor Adrian Orr told Bloomberg Television from Jackson Hole.

The soaring cost of living has left politicians as well as central bankers feeling the heat – especially in Europe, where natural gas prices more than seven times higher than a year ago have triggered an energy emergency.

Inflation in the euro area is forecast to accelerate beyond July’s record 8.9 per cent and Citigroup predicts that it could exceed 18 per cent in the UK, in part because a cap on energy bills just got lifted. All kinds of once-unlikely proposals, from nationalization to power rationing, have been floated to address the crisis.

The United States, by contrast, will experience the fastest slide in inflation among developed economies, thanks in part to the strength of the dollar, the JPMorgan economists say.

That won’t stop the Fed from tightening into restrictive territory. Anna Wong, chief US economist at Bloomberg Economics, expects the Fed will eventually have to raise rates as high as 5 per cent to rid the US of its inflation problem.