Global inflation and monetary response

Summary

This report is intended to help readers make better sense of the current inflation situation and the accompanying monetary response. It provides a framework that highlights key aspects of today´s dynamics that reveal in important ways how they are both similar and distinct to those of the 1970s crisis.

Key points

• Key points:
• In the US and the EZ, aggregate consumer price indices are expected to increase by 8% this year alone.
• A key difference with the 1970s is monetary policy, which today counts with very high levels of credibility and autonomy. In addition, authorities now employ a risk management approach that is leading them to pre-emptively counter second-round effects.
• To that end, current monetary authorities are closely monitoring long-term expectations, some key price references (such as wages and exchange rates) and the mechanics of price formation.
• We expect the Fed and the ECB to continue their pre-emptive fight against any de-anchoring of expectations by maintaining a tightening stance and not easing it until at least 2024. Accompanying the tightening cycle, our current central scenario includes soft landing in both geographies.
• Yet uncertainty is high: the persistence of current supply shocks is still unknown (especially for the eurozone). Moreover, both the Fed and the ECB remain uncertain about some of the key economic parameters that condition a properly calibrated response.

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