It’s too soon to say, writes Bernard Hickey – but he’s more confident than ever that the current inflation shock will be sharp but short-lived.
This article was published on Bernard Hickey’s newsletter The Kākā on Friday.
For more than a year “Team Transitory” – those like me who continue to predict a long term trend of ever-lower (or at least low) interest rates and inflation – have been in retreat under a constant barrage of inflation surprises and central bank rate hikes.
But this week the tide turned, at least for a week, thanks to a number of indicators including:
- Commodity prices fell sharply towards their pre-Ukraine war levels of late February on signs that the price spikes in March, April, May and June had created “demand destruction” and were likely to cause recessions in the United States and Europe later this year or early next year;
- US inflationary expectations for the next five years continued dropping below 2.5% (see chart below) and the US 10 year Treasury yield dropped solidly below 3% for much of the week (as of Friday morning it was at 3.0%);
- US 30-year mortgage rates, which drive a lot of activity in the world’s largest economy, fell to 5.3% from 5.7%; and,
- ANZ, BNZ and Westpac cut their two year mortgage rates around 30 basis points to around 5.4%, our wholesale interest rates having followed the global trends and falling 50-80 basis points over the last three weeks.
In my view, it’s probably too early for Team Transitory to declare victory, but some faith is being restored in my long term view that low inflation and interest rates will reassert themselves after the Covid and Ukraine war shocks. That’s because of fundamental global macroeconomic forces including:
- Ongoing globalisation of manufactured goods supply chains, which is still largely intact despite the exit from Russia and fears about China;
- The evaporation of service industries globally into AI-driven and jobless clouds;
- The continued weakness of labour negotiating power with increasingly large (and monopsonistic) companies; and,
- The widening gap between the extremely rich and the ever-poorer in developed countries is continuing to generate growth-sapping wealth gluts and restrained productivity growth as the children of the poor sicker and less productive as adults.
What could come next
Falling inflation and interest rates again put upward pressure on asset prices and rentier incomes, creating a feedback loop that worsens inequality and adds to the political pressures eroding democracies and undercutting efforts to fight climate change.
New social contracts and political change to redistribute income and wealth are needed to reverse these awful and perverse feedback loops, in my view.