Inflation: Higher but Not Forever
What You Need to Know
Inflation remains front of mind for investors and policymakers alike. Prices are rising at a rate not seen in generations, confounding expectations that a broader reopening of the global economy would ease pressures. Instead, a perfect storm of disruption has impacted the supply side of the global economy, pushing prices higher.
Those disruptions are resistant to forecasting, making it impossible to project near-term inflation. We don’t know when Chinese lockdowns will end, helping the global supply chain to heal. And we don’t know when the war in Ukraine will end, easing pressure on tight global commodity markets.
Given these uncertainties, why are we increasingly confident that prices will eventually moderate? Because while we lack visibility on the supply side of the global economy, developments on the demand side are coming into clearer view.
Monetary Policy Affects Demand
Prices reflect the interaction between supply and demand. When demand outstrips supply, prices must rise to re-equilibrate the economy. Supply-side constraints, such as Chinese lockdowns or war-induced commodity shortages, are beyond the purview of monetary policy—central banks can’t solve those issues by changing interest rates.
What they can do is slow demand such that, even in an environment of constrained supply, price pressures abate. That means tightening monetary policy to slow growth to a rate consistent with the ability of the supply side of the economy to keep pace.