Bravo to the central bankers, says The Economist. The likes of the Bank of England and the US Federal Reserve appear to have pulled off mission impossible – bringing down inflation without crashing the economy. In 2022 the average rate of inflation across developed countries peaked at about 10%. Large interest rate hikes followed and inflation in most developed economies has now fallen below 3% (annual UK inflation was 2.2% in July).
Previous central banks’ battles with inflation tamed prices only at the cost of “deep” recessions. While the going has been tough this time, severe pain has been avoided. Interest rate theory worked in practice, with hikes causing just enough cooling in labour markets to ease wage pressure, but not so much that they triggered mass unemployment.
Are central banks the reason that inflation is lower?
A recent central bankers’ summit at Jackson Hole verged on the “self-congratulatory”, says Martin Sandbu in the Financial Times. Financial elites gathered in the Wyoming wilderness and patted each other on the back. They believe central banks deserve a decent share of the credit for defeating inflation. Yet there are holes in this self-serving narrative.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
For one thing, interest rate rises don’t magically cool down hiring. Businesses only hire less when they first see actual weakness in the economy. While the picture has been a little different in Europe, US growth has been so strong of late there is little evidence that this is what actually happened. Recent shifts in the labour market may just be things returning to normal following a period of intense disruption following the pandemic. With the job largely done, the Fed is “all but guaranteed” to cut US interest rates later this month, says Paul Krugman in The New York Times. US consumers’ expectations of future inflation peaked in the summer of 2022 and have since returned to pre-Covid levels.
While Kamala Harris will struggle to convince voters the Democrats have actually “done a good job managing the economy”, surveys show the economy slipping down voters’ lists in favour of other priorities. Inflation is “fading away – not just in the data, but also as a political issue”. In the UK, investors are licking their lips at the prospect of more Bank of England rate cuts to end the year, says Liam Halligan in The Telegraph. Cheaper borrowing would also ease the size of the Treasury’s “gargantuan debt-service bill”. The optimism could be misplaced.
Inflation looks set to tick up slightly over the coming months, boosted by a £149 rise in the average household energy bill this October. Geopolitical chaos could blindside us again with another inflationary shock, not to mention recent “inflation-busting trade union pay” agreements. “Inflation is by no means tamed.” It “could even return with a vengeance”.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
-
Rightmove: UK asking prices up more than usual but Budget uncertainty remainsNews The property website’s latest House Price Index shows sales are rising and buyers are benefiting from more choice – but will the Budget dent market confidence?
-
8 of the best properties for sale with striking gardensProperties with striking gardens – from a 17th-century longhouse in Carmarthen, Wales, to a 16th-century manor house in Hampshire with formal parterre gardens.
-
Why are tourists a problem around the world?Tourists are good for the economy, but not always for residents, says Alex Rankine
-
Ukraine invades Russia – what are the political implications?Ukraine's surprise invasion into Kursk could change the course of the war politically
-
UK stocks have become a global favourite – should you invest?The world is taking to UK stocks – but how long will it last?
-
Middle East conflict: will it escalate?Fears of a wider Middle East war are well-founded. What's happening and why?
-
Will central banks cut interest rates?Central banks shouldn’t rush to lower interest rates, but it seems likely that they will cut further than expected
-
Brazil's economic outlook dampens – what it means for investorsWhile Brazil's markets enjoyed a high last year, they now walk on the "financial wild side" as investors grow wary of president Lula's spending plans
-
Why is the Japanese yen weak?The yen has weakened far more than expected, even though the economy and stocks are looking much healthier
-
Maduro clings to power in Venezuela – can he last?While Maduro clung to his presidential seat, Venezuela's election protests paint a different picture
