During a news conference, U.S. Federal Reserve Board Chairman Jerome Powell commented on the current battle against inflation. According to Kokou Agbo-Bloua, a top economist at Societe Generale, central banks are now in the next phase of this battle, as core prices remain persistently high due to various factors.
Agbo-Bloua mentioned that the market is expecting the Federal Reserve to raise interest rates based on the strong labor market and the resilience of the economy. The market currently prices in a more than 90% chance of a rate hike by the Fed at its upcoming meeting.
Although U.S. inflation has cooled slightly, core inflation remains high, indicating ongoing inflationary pressures. Agbo-Bloua compared the current situation to Winston Churchill’s famous quote during World War II, suggesting that it’s not the end of the battle against inflation, but rather the end of the beginning.
Agbo-Bloua highlights several factors contributing to high core prices, including government spending to maintain the economy during the pandemic, supply chain disruptions, excess savings, and companies’ ability to raise prices above what is justified. He argues that companies have developed a “natural immunity” against interest rates by passing on higher input prices to consumers.
The tight labor market and lower labor productivity growth have also resulted in increased wage prices, creating a negative spiral. Agbo-Bloua suggests that central banks may need to trigger a recession to tighten the labor market and reduce demand. However, he acknowledges that the impact of monetary policy tightening often lags the real economy by several quarters.
Inducing a recession
Agbo-Bloua believes that central banks, particularly the Fed, will need to continue raising interest rates until they induce a recession. He predicts that the U.S. will experience a recession in the first quarter of next year, while Europe may see a slowdown but not a recession. The U.S. recession is likely to affect corporate profit margins and consumer spending patterns.
Another expert, Nathan Thooft of Manulife Asset Management, agrees that while a recession may be postponed, the global economy could remain in a period of below-trend GDP growth. He points out that global growth is expected to settle below the threshold that would indicate a global recession.
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