A light at the end of the still long tunnel of inflation

A little over a year ago, the discussion about the transitory nature of inflation was still alive in the public debate. At that time, the argument was still common that the inflationary pressures that were present globally from the first quarter of 2021 were due to the concurrence of various factors that, sooner rather than later, would prove to have a merely temporary effect on prices. .

The Covid-19 pandemic caused severe effects on global supply chains that prevented supply from being able to meet strong demand in a timely manner, driven both by the recomposition of household consumption patterns and by fiscal and monetary stimuli. implemented by governments. The expectation was that as the world left behind the most severe ravages of the pandemic, supply and demand would soon find a new equilibrium with price stability. This did not happen and, on the contrary, the global inflationary environment became more complicated with the rise in energy and food prices after the outbreak of the war caused by Russia’s invasion of Ukraine in February of this year.

After several months of disappointing inflation reports, last week it was announced that general inflation in the United States was 7.7% in October, less than the 8.2% figure registered in September and, more importantly, less than 8.0%. expected by the consensus of analysts. Similarly, core inflation, which excludes energy and food prices from its calculation, slowed from 6.6% in September to 6.3% in October, also turning out to be lower than the figure of 6.6% expected by the consensus. It is the first time in the current inflationary cycle that a slowdown in headline inflation greater than two decimals is accompanied by a slowdown in core inflation.

This flooded the financial markets with optimism. The S&P 500 Index rose 5.5% in a single day and the 10-year Treasury yield fell 0.3 percentage points to 3.8%, giving 30-year mortgage rates a breather, which fell back to 6.9%. after having oscillated around 7.3% since the second half of October. The dollar also lost some ground.

Just as time was in charge of resolving the debate on the transitoriness of inflation, time will tell us if these outbreaks of optimism are justified. In order to return to an environment of price stability, inflation must not only slow down, but recede and remain at levels close to central banks’ inflation targets, which are generally around two to three percent.

The current commitment of monetary policy makers to fighting inflation means that this will most likely happen eventually, but it will take some time. In its most recent report on the outlook for the world economy, for example, the International Monetary Fund forecast that after reaching 8.8% this year, global inflation will fall to 6.5% in 2023 and 4.1% in 2024 amid a slowdown of global economic activity stronger than expected. In any case, the future of the economy in the coming months will continue to be shrouded in high uncertainty.

*Iván Fernández is a senior economist at BBVA Mexico.