Yesterday the Bank of England surprised markets by narrowly voting to maintain interest rates at 5.25 per cent.
The move, which came on the heels of a better-than-expected inflation figure earlier in the week, begs the question: is inflation finally coming down?
The shockingly simple answer is: no one knows.
Across the City, professional forecasters disagree and change their minds almost on a weekly basis. According to a survey by Bloomberg, inflation for 2024 will be anywhere from 2 per cent to 4.5 per cent – an extremely wide range of outcomes. And they still might miss the mark.
The market has been persistently wrong about both price rises and the course of interest rates for more than 18 months.
In September 2022, the bond market was pricing in a terminal (highest) rate of 3.5 per cent. Two months later, the number was 4.6 per cent. We are now nearly 1 per cent higher than that, and we could end up even higher.
The experience from the 1970s is that inflation is a rather tricky and dangerous animal that should never be underestimated. Much like a wild bear, the longer it hibernates, the smaller the experience policymakers have in dealing with it and the more ferocious its appetite becomes.
But, unlike the bear, it will not go back to sleep at a predicted time. In fact, it can take years to put back in its cage.
After a wild ride in the 1970s and 1980s, inflation went missing for more than two decades since China ascended to the world stage in the mid-1990s and began to export deflation (in the form of cheaper TVs, toys, parts, etc).
Economists were wondering whether we would see prices rising again, or whether high levels of debt had 'Japanised' the global economy beyond repair.
How did we get here?
It took the combination of big and unpredictable events to change that status quo and wake up the sleeping beast. It started with the pandemic and lockdown, which threw global supply chains into disarray.
Then, the pandemic accelerated China’s metamorphosis from a global producer to a global consumer nation and a competitor for geopolitical supremacy, which meant that Chinese disinflation would no longer provide comfort for Western consumers.
Even then, inflation was viewed as transitory by central banks who predicted it would go back to sleep soon. It may well have gone that way, were it not for a third catalyst, the war in Ukraine, which caused massive rises in food and energy prices.
Meanwhile, consumers, especially in the US, found themselves with a lot of extra cash due to pandemic support cheques and savings.
As the world transitions from Chinese to India-based supply chains and at the same time invests massive resources towards energy sustainability, yet more inflation is generated.
