A just-published report updated our longer-term macro-economic and policy outlook, in view of the sharp swing in sentiment that is now expecting a recession, perhaps imminently. Global growth is slowing but our analysis highlighted that monetary conditions are not the cause of economic stress, and many of the factors currently slowing growth are temporary in nature.
One of the longer-term macro influences that has profoundly changed from last decade has been the end of deleveraging in the household and financial sectors in the U.S. and parts of the euro area. Deleveraging depressed growth and suppressed inflation during most of the 2010s. An end to this significant economic drag, combined with massively accommodative monetary and fiscal policies, have generated a more inflationary backdrop than last decade.
There have been a series of one-off factors that boosted both headline (energy prices) and core (especially goods prices) inflation rates across the developed market economies. These factors will unwind in the coming year, and CPI will decline. However, a return to a 2% inflation environment is unlikely: output gaps have closed, wage gains and strikes have returned, and longer-term inflation expectations have perked up after being dormant for decades.
Net: stay on guard for another upleg in bond yields beyond the next 3-6 months.