The prospect of inflation falling alongside a gradual return to the pre-pandemic state of affairs is implicit in how central banks are framing the path forward.
Among the Fed, ECB, and BoE, only the British central bank projects a recession will be needed to slow inflation – only a mild one at that. The ECB expects to win its inflation battle with no change in the unemployment rate. US central bank officials have split the difference, projecting a modest one-percentage-point rise in the unemployment rate this year from its near-historic low of 3.5%, and slow, but continued, economic growth.
There have been some notable declines in inflation across Europe and the US. Yet they have been driven by the most volatile components – particularly energy costs – whileWhile the core ECB expectation is for falling profits, improving supply chains, and lower energy prices to bring down inflation, some officials worry that, in a world of labor scarcity, that won’t be enough.
“Corporate profit margins still remain high, wage pressures are strong, and the labor market is tight,” Kazaks told Reuters. “All these point to the view that inflation persistence is relatively strong and that rates still need to go up.” “I think they do have a coherent story, which is that they’re going to cause a recession,” Furman told Reuters on the sidelines of the IMF and World Bank meetings. “You don’t hear it very clearly…. I think they also have a hope for a ‘soft landing,’ and that probably shows up in being a little bit more timid in their policy” than might ultimately prove necessary.
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