war or peace? Politicans, and bankers, should fight inflation

 [5 min read, open as pdf]

• Rate hikes can slow easy money, but can’t stop price inflation
• Choking off growth would be a policy own-goal
• Inflation is a problem, as long as war is a problem

 
Markets entered panic mode this week on fears, that all three “macro” factors – Growth, Interest Rates and Inflation – are all heading the wrong direction.

1. Inflation risk: This has been rising since September 2020 – aided by years of easy money from near-zero Interest Rates Policy and “Quantitative Easing”, abetted by supply-chain disruptions in the post-Covid restart, and finally ignited with the Russia/Ukraine war and sanctions blowback.
2. Interest Rates: Policy error at the Fed through 2021 resulted from believing their own rhetoric that inflation was “transitory”.  Whether “been behind the curve”, or “asleep at the wheel”, Central Banks are now having to show they are playing catch up with assertive rate hikes.  Whilst tighter monetary policy will slow down lending and monetary inflation, it won’t do anything to stop price inflation.  That’s for the politicians to solve.
3. Growth Risk: the combination of inflation (reduced spending power, lower disposable income), rising interest rates (higher mortgage costs is undermining consumer confidence and could trigger a recession. It is this latter risk that has rattled markets so much this week.

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