Sticky

It’s the time of year for the much anticipated slew of sell-side strategists ‘year-ahead’ pieces, whereby the turning of the calendar year fires up a commercial opportunity to opine on what may or may not happen next year. That markets are a constant evolving melee of mood and real time data and company earnings and all sorts of other stuff, makes it all a bit random, but never mind. Those forecasts though, are just that, forecasts, best guesses; and whilst many have models and spreadsheets to back them up, few consistently nail it. That said, calling what happens to inflation through 2023 is important for many, and whilst there is Central Bank driven view that inflation will fall rapidly, work done by some analysts suggests that while this may be true, it may also be wildly optimistic. The Spanish-American philosopher, George Santayana, once wrote “Those who can not remember the past are condemned to repeat it” in warning to those who think the inflation genie is a benign and biddable foe. History, warn the authors, tells us that it can take far, far longer to return to normal levels than many realise. Indeed, grazing the near two hundred instances of policy hikes of more than 1% – in developed markets that is – the average lag until a 1% decrease in inflation filtered through was between two and four years. And this time round the genie has de-globalisation, steamy geopolitics, ageing workers and an uber expensive energy transition cheering it on. More worrying still, in instances of when inflation breaches 8%, it powers higher 70% if the time. Getting inflation back to ‘target’ so says history, may take a lot longer than many currently expect.