Economics: A new era of inflation surprises
Are markets complacent about the medium-term inflation outlook?
Inflation appears to have peaked for now, and both markets and economists expect it to decline back towards 2% and remain there. Is that a realistic forecast? Further declines look likely in the short term. But the medium-term outlook looks more difficult.
The global economy could be looking at more frequent inflation shocks
We see three potential sources of inflation. First, climate change and US-China tensions could subject the global economy to repeated supply shocks. Second, central banks might face sharper policy trade-offs. And third, inflation targets could get raised.
Higher inflation & inflation volatility could raise risk premiums
Increased volatility in inflation is likely to be a central feature of this new regime, with inflation potentially averaging 2½-3%. This could get reflected in higher breakeven inflation rates, and continued instability in the correlation between equities and bonds.