The decline in inflation will not be as sharp as its rise

The cost of shipping a 40-foot container across the world’s oceans has fallen. Core inflation in the United States is declining.
Finally, there have been some convincing signs that the price hikes in the market, from copper to used cars, that we have seen over the past year may now be behind us. Is it time to come out and say that inflation has been defeated? not exactly.
However, this does not mean that the decreases in the cost of shipping containers and goods are not significant. It shows us that global trade, far from being on its deathbed, is resilient. This dynamic will help reduce price pressures on the supply side.
But pandemic-period bottlenecks, as its name suggests, are inevitable. At the same time, the massive “and less likely to vanish” supply-side risks of Russia cutting off, or even limiting, gas flows to Europe remain a threat.
To get an idea of the degree to which energy prices are driving headline inflation, consider this. According to Ben Broadbent, Deputy Governor of the Bank of England, the impact of the shock on household utility bills between the first quarters of 2021 and the first quarters of 2023 is likely to be five times greater than it was between 1974 and 1976, the worst two years of the 1970s, which was notorious for the price crisis. oil.
We do not wish to underestimate the importance of the good news. In the United States, least exposed to the effects of the Ukraine war, core inflation may have peaked. While it may take a little longer in Europe, record highs will soon subside in Europe as well.
But we caution against looking at today’s levels for evidence that the Fed, and other central banks, may be about to switch to a much less aggressive strategy, or, as some investors calculate, cut rates early next year as a recession hits.
What really matters to policymakers is not where inflation is headed, but how quickly it slides toward a level they are comfortable with.
Our bet is between 2 and 3 percent. But there is much to suggest that price pressures may remain around the 4-5 per cent level for some time now.
The potential for a slow turnaround to 2 per cent is not just about energy price risks, however important they are.
While monetary policymakers, including Jay Powell, the Federal Reserve Chairman, have been eager to pin their failure to pin inflation on supply chains and the war in Ukraine, that is not the only element that has driven prices higher.
As Stephen Seketty of Brandeis University explained, “It is strange that central bankers focus so much on supply-side inflation, when demand is such a large component of the upside, particularly in the US.”
An essential part of the demand side story is the heated labor market. Tiffany Wilding and Alison Boxer, economists at Pimco, noted in a note published Wednesday that wage inflation in the United States has expanded from low-wage, low-skill service sectors to a range of industries, occupations and skill levels. Meanwhile, productivity levels have fallen.
They estimate unit labor cost inflation at 7 per cent, a level that has historically suggested core CPI inflation of around 4 per cent. If Powell really wants to bring inflation down to 2 per cent, the Fed will increasingly appear to have to destroy jobs.
Then there is the element of self-inflation, the presence of which simply leads to the creation of more of these things.
Joanna Konings, chief economist at ING, points to the likes of UK dairy farmers, who may have spent years unable to raise their prices due to the influence of supermarkets, but who can now point to higher energy and commodity prices and demand more. “When it’s easy to point out inflation, when costs are obviously very high, that gives any supplier a better chance. Producers are able to point to higher prices, so they demand more from their customers,” she says.
This world of margins doesn’t have unlimited wiggle room. Consumer prices for basic commodities such as food, energy and shelter have risen at a pace that has left many people facing the worst cost-of-living crisis of their lives. This crisis, and the rise in central bank interest rates, will affect demand. However, this fight between supplier, retailer and consumer is likely to take some time before it ends. While that happens, uncomfortably high inflation will be more difficult to divert than a large boat stuck in the Suez Canal.