The bad news about inflation keeps coming . Inflation in rich countries is above 9% a year, a high not seen since the 1980s – never before have there been so many “inflation surprises” that economists had predicted. This in turn has dealt a heavy blow to the economy and financial markets. Central banks are raising interest rates and ending bond-buying programs, crushing securities markets. Consumer confidence in many places is now even lower than in the early days of the covid-19 outbreak. All “real-time” economic indicators, from the housing market to manufacturing output, point to a sharp slowdown in growth. So what happens next in consumer prices is one of the most important questions for the global economy. Many forecasters believe annual inflation will subside soon, in part because commodity prices, which rose sharply last year, have fallen year-on-year this year. The Fed’s most recent economic forecast sees annual inflation in the United States falling from 5.2% by the end of this year to 2.6% by the end of 2023. You can be forgiven for not taking these predictions seriously. After all, most economists failed to foresee the inflation surge coming, and then wrongly predicted it would subside soon. In a paper published in May, the Federal Reserve’s Jeremy Rudd made a provocative point: “In my view, compared to the 1960s, our understanding of how the economy works and our ability to predict the impact of shocks and policy actions has not gotten any better.” The future path of inflation remains largely shrouded in uncertainty. Some indicators point to more price pressure in the near term. The consultancy Alternative Macro Signals used a model to study millions of news articles to create the News Inflation Pressure Index. The result, which is more timely than official inflation data, takes into account not only how often price pressures are mentioned, but also whether those news streams indicate increasing pressures. In the U.S. and the euro zone, the index remains above 50, indicating that pressures continue to build. Inflation concerns point to three other indicators: the pace of wage growth and rising inflation expectations among consumers and businesses, suggesting that rich countries are unlikely to return to the pre-pandemic normal of stable, low growth in prices.
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