Inflation is cooling across the Western world, but don’t grab your party hats just yet.
Driving the news: Over the last month, the Bank of Canada, US Federal Reserve, and European Central Bank (ECB) each raised their respective key interest rates by 0.25 of a percentage point, bringing the cost of borrowing in Western markets to 22-year highs.
- Central banks have raised rates in lockstep with the US, in part to mitigate problems tied to a surging US dollar (since it denominates a huge amount of trade and debt).
During that time, headline inflation has fallen in Canada, the US, and the EU from peaks of 8.1%, 9.1%, and 10.6% to 2.8%, 3%, and 5.5%, respectively. That’s decidedly good news.
But economists are still split on what should happen next…
- On the one hand, some believe more interest rate hikes are needed, arguing that inflation stuck above 2% will damage people’s expectations for price stability.
- On the other, some say further rate hikes are unnecessary (and could trigger a recession) and aren’t the right tool to cross the “last mile” to the 2% target, anyway.
Why it matters: The wrong move could disrupt asset markets and the economy. Central bankers are leaving the door open to both options but remain committed to doing whatever it takes to bring inflation down to target—most agree this last mile will be the hardest.
Botton line: The third (and best) case scenario is that interest rates are not too low, and not too high, but just right to continue to cool growth without a recession—or stick a ‘soft landing,’ in economist speak.—SB