Markets continue to trade within narrow ranges. The reopening of economies has delivered a strange brew of supply chain issues, shortages, stuttering industrial production and inflation. Supply chain problems will eventually sort themselves, as will shortages but as we’ve said many times before, we doubt inflation will be quite so easy to fix,
All major central banks held the cost of borrowing at ludicrously low levels for far too long. They’ve all said higher prices were temporary yet all have subsequently acknowledged prices will stay higher for longer. We suspect it is only a matter of time before they’ll be forced to admit to being somewhat over optimistic. Some of us would go further; recklessly complacent or unbelievably inept, perhaps?
At this point, tough decisions will be required. Do they meaningfully raise rates to choke off the inflation they’ve very successfully incubated or do they make only token efforts, terrified that economies cannot cope with the shock of, say, a tripling of borrowing costs? Seeing how they’ve operated thus far, we plump for the latter.