July 19, 2022
Spurred by high energy prices and continued supply chain dislocation, inflation is at a multi-decade high in many advanced and developing economies.
Inflation is approaching 10% in the United States, United Kingdom and the euro-area, squeezing disposable incomes and dampening spending. Most central banks are raising rates aggressively but governments are under increasing pressure to increase spending.
Supply-side strains will persist, as will energy, transport and job market dislocations, leading to shortages, volatile prices and pressure for government intervention. Higher interest rates cannot solve energy and other supply-side strains, but they can dampen the post-pandemic recovery of consumption and investment. The US Fed Funds rate is likely to end 2022 close to 3.0%. As well as dampening US consumption and real estate markets, this will bolster the US currency and pressure dollar-indebted emerging markets, and encourage the ECB to tighten policy. As many economies risk recession, economic and social inequalities will rise, within and between countries.
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