Central banks change their tune on inflation
With prices rising at 7.9% in the US and 6.2% in the UK, and global commodity prices surging, central banks around the world are being forced into inflation-fighting mode.

“The expectation going into this year was that we would see inflation peaking in the first quarter and maybe levelling out” before cooling in the second half of the year, US Federal Reserve chair Jerome Powell said this week. “That story has already fallen apart.” With annual inflation running at 7.9% in the US and 6.2% in the UK and global commodity prices surging because of Russia’s invasion of Ukraine, central banks around the world are being forced into inflation-fighting mode.
Last week the Fed raised interest rates for the first time in four years, while the Bank of England delivered a further 0.25 percentage point hike to 0.75%. This week Powell suggested that the Fed could even serve up a half-point increase (rather than the usual quarter-point increment) at a future meeting if it felt inflation was running out of control.
Don’t mention the war
The key message from central bankers in Europe and America is that the war in Ukraine will not derail their plans to tighten monetary policy, says Neil Shearing of Capital Economics. The risk is that this cycle of interest-rate rises will end up causing a recession. The “lessons from history are troubling”. Of the 16 tightening cycles done by the Fed, Bank of England and European Central Bank since the late-1970s, 13 ultimately ended in recession.
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
The Bank of England now projects that UK inflation could hit 8% in the coming months, four times the 2% target, says Mehreen Khan in The Times. Even “double-digit inflation” looks a possibility later this year, for the first time since the early 1980s. But critics think the Bank is “dangerously behind the curve on taming inflation”, with the Bank’s reference to “further modest tightening” taken as an indication that it intends to hike less quickly than the Fed from now on. “The Ukraine crisis has changed the mood.” Markets are now expecting UK rates to be around 2% come the end of the year, down from a forecast of 2.5% previously.
Stocks are on thin ice
Tighter monetary policy has caused bonds to sell off as markets demand higher yields. US two-year Treasury notes are on course for their worst quarterly performance since 1984. Yet surprisingly stocks have so far avoided the pain, with US markets enjoying their best week since November 2020 last week and continuing to rally this week. In Europe, the Stoxx 600 index has erased its post-invasion losses. In another sign that markets have digested the invasion shock, the Vix index of expected volatility derived from S&P 500 option prices – dubbed Wall Street’s “fear gauge” – has fallen back to early February levels.
Higher interest rates should be “terrible for stocks and even worse for unprofitable tech shares”, says James Mackintosh in The Wall Street Journal. So why is even Cathie Wood’s ARK Innovation ETF of highly speculative stocks enjoying a bounce? Some traders are going bargain-hunting: over the last 30 years, they have got used to buying dips on the expectation that the Fed will “ride to the rescue” if stocks tank. But with central banks now focused on fighting the inflationary peril, buyers shouldn’t count on a “Fed backstop” this time.
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.
Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.
He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.
Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.
-
What makes you wealthy in the UK? Could it make you a target in Rachel Reeves’ Budget?
Wealthy Brits could be at risk from a Budget tax raid – but how much money do you need to be considered wealthy in the UK?
-
More retirees are buying inflation-protected annuities. What are they and how do they work?
Sales of annuities where the income on offer increases every year have surged – and more people are also taking up enhanced rates that are higher due to illness
-
Global investors have overlooked the top innovators in emerging markets
Opinion Carlos Hardenberg, portfolio manager, Mobius Investment Trust, highlights three emerging market stocks where he’d put his money
-
Investors should cheer the coming nuclear summer
The US and UK have agreed a groundbreaking deal on nuclear power, and the sector is seeing a surge in interest from around the world. Here's how you can profit
-
Healthcare stocks look cheap, but tread carefully
Shares in healthcare companies could get a shot in the arm if uncertainty over policy in the US wanes, but are they worth the risk?
-
The Palace of Westminster is falling down
The Palace of Westminster is in need of repair, but the bill is prohibitive, says Simon Wilson
-
'Gen Z is facing an AI jobs bloodbath'
Opinion It has always been tough to get your first job, but this year, it's proving tougher than ever. AI is to blame, says Matthew Lynn
-
Should the Online Safety Act survive?
The Online Safety Act, a measure to safeguard children, is having unintended consequences
-
The secret behind Sweden’s success
Opinion Sweden's stock market is in rude health, says Max King. Why can't Britain follow suit?
-
Prabowo Subianto: Indonesia’s Deng Xiaoping
Prabowo Subianto, like his Chinese hero, is taking power in his 70s with big ambitions for his country. Yet many view his return to politics with dread