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Opinion | Inflation isn’t scary. Central bankers getting militant about it is
- Inflation is already primed to retreat but policymakers are only starting to become more assertive about fighting it
- That raises the prospect that central bankers will tighten too far, too fast, harming economic growth and triggering more market volatility
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It feels like talk of inflation has become all-consuming. From grocery shops to Google Trends and the front pages of every financial newspaper, rising prices – and their impact on daily lives – are on everyone’s mind.
Perhaps most ominously for investors, what used to be couched as a “transitory” post-Covid-19 price reversion has started to sound much more rooted in policymaker rhetoric. Markets have priced in this attitude change and are bracing for sharp monetary tightening as central bankers look to regain credibility after a year of inflation “surprises” and accelerating price rises.
Faced with this once-in-a-generation phenomenon, commentators have started to examine the 1970s inflationary wave for clues about what could befall markets.
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While it is easy to draw initial parallels with the 1970s oil-induced inflation, a closer look at recent price drivers shows a different script. Policy mistakes from central bankers now pose the greatest risk to the economy; the market should be more worried about the US Federal Reserve than inflation.
The main argument against a rerun of 1970s-style inflation is monetary. What drove prices five decades ago was a sustained and significant increase in the money supply.
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While pandemic policies did cause money supply to rise at its fastest since the 1970s, these have either run their course or been rolled back, triggering in recent months a sharp deceleration in new money growth.
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