Did these central banksters get it wrong, or what?
If you dial back to Q3 last year, all the talk was about 'transitory' inflation. That's a big shift in communique when you weigh up the ECB and BOE policy meetings yesterday.
The big worry remains that of inflation and central banks are responding in kind. But will it work to rein in price pressures and anchor inflation expectations? Traditionally, one would think so but the situation this time around is rather different.
BOE governor Bailey put it quite nicely himself back in September here:
Monetary policy cannot solve supply side shocks. Monetary policy cannot produce computer chips, it cannot produce wind, it cannot produce truck drivers.
And I outlined how this was arguably the only route that could be taken back then:
Instead, what we might get is more persistent inflation - one that is likely to be volatile as it is tough to predict - in a time when the global economy faces limited growth potential.
Again, key word there being persistent.
As such, central banks are going to find it tougher by the day to keep maintaining their view that all of this is 'transitory' but they themselves know that they are not adept in dealing with the root of the problem and are just hoping that it resolves eventually. That's not exactly a plan but it's the best one that they've got.
So, what does that mean for the market and for risk assets?
In a world of persistently high and volatile inflation coupled with tepid economic growth, it paints a rather dangerous picture for risk assets especially when central banks' only response is to be more "hawkish" (even if they don't intend to be).
So, what next?
The biggest fear is that this hawkishness is not going to help find a solution to the inflation conundrum. If so, that will cause a heavy toll on economic conditions - which are in no way overheating at the moment.
Stagflation risks are a key worry but I reckon we might skip straight to the bad part without any semblance of wage-price spirals. That in my view is probably the worst-case scenario if inflation pressures fail to cool off by year-end.
