Inflation Watch: Are Central Banks Winning?

The battle against the post-pandemic inflation surge has been the defining economic narrative of the last two years.

The “Transitory” Mistake

Central banks initially dismissed inflation as transitory, caused by supply chain snarls. By the time they reacted, wage-price spirals had begun to set in.

The Rate Hike Cycle

The Federal Reserve and ECB embarked on the most aggressive hiking cycle in history. The result? Inflation has come down from 9% peaks to the 3-4% range.

The Sticky Components

While goods inflation has collapsed (and in some cases turned into deflation), services inflation remains sticky. Housing costs, insurance, and wages are proving resistant to higher rates.

The risk now shifts to “overtightening.” If rates stay higher for longer, the probability of a recession increases. The “soft landing” is in sight, but the runway is narrow.