Interest rates: Are we really getting inflation under control?

Already a subscriber?This week, Jerome Powell, the head of the powerful US Federal Reserve, confirmed investors’ worst fears: inflation is proving to be a more stubborn and cunning foe than expected.

Worries that inflation is proving far from biddable has pushed the yield on US 10-year bonds – considered the global risk-free asset – to 4.6 per cent, up from 3.9 per cent at the end of last year. JPMorgan Chase boss Jamie Dimon has one explanation. He argues that there’s a widespread failure to understand the magnitude of the forces fuelling price pressures.

Instead, it’s the services sector that’s driving the rise in inflation, and particularly in medical services and housing, which were both higher than expected in the first three months of the year. But, he adds, “I’m pretty confident that when you roll it forward into the middle of the year, inflation will be stepping down from its present pace of 0.4 per cent a month to 0.3 per cent and then to 0.2 per cent as we enter the second half of the year. And that is still sufficient to get some easing.”

“I do think unemployment will continue to creep up as the economy absorbs the effect of past rate hikes, but it will still be pretty low.” “We know that inflationary expectations are really important to inflation outcomes, and these have crept up a little in the latest ANZ and Melbourne Institute surveys.“And that means that workers may collectively continue to bid for higher wage growth, or firms may plan for quite large price rises when they revisit their annual budgets.

“The federal government has been patient with spending – it has been fairly disciplined,” Murphy says. “So why risk cutting too early and sending the wrong signal, only to have the economy and inflation run away?”“The Reserve Bank has a problem because the country needs more housing supply, but it won’t want to fuel another upswing in housing prices by cutting interest rates too sharply too soon. And I think that will continue to moderate their enthusiasm for rate cuts.”

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