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Investing.com – A bank appears to have found a win for its war on inflation view, which has jumped to an all-time high by more than 40%.
Adam Posen, a former Bank of England official who now heads the Peterson Institute for International Economics, says by the end of 2023 there will be a drop in US inflation to 3%.
The former BoE official added that the latest US data clearly shows that a Fed hike will eventually work.
Posen ruled out that the US economy will fall into a difficult recession trap, stressing that the Fed will eventually be able to cope with inflation.
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Inflation down
“Inflation will be in triple digits a year from now and trending downwards,” said Posen, director of the Peterson Institute for International Economics, adding that the decline is amply demonstrated.
In November, the central rate of the Fed’s favorite measure of inflation, the Personal Consumption Spending Index, rose to a rate of 4.7%.
“The key question for the outlook is how quickly inflation could fall from about 3.3% at the end of next year, to the Fed’s 2% inflation target,” Posen said.
A related question was how far the Fed would need to raise its key interest rate above the high range reading of 5.25% it expects in February to get there.
Password stress
Posen said inflation is already easing due to improvements in the supply chain, noting that the tightening policy could end by the end of next year.
“So my view is that most of the future improvement in inflation in 2023 will come from Fed tightening,” added the director of the Peterson Institute for International Economics.
Posen said wages are rising at a pace that is out of step with low and falling productivity growth, despite the fact that workers still don’t see much benefit from higher wages due to inflation.
dissenting opinion
On the other hand, Matthew MacLennan, co-head of the global value team at First Eagle Investment Management, said: “He sees the low inflation forecast as a big mistake.”
There is a real risk, according to Matheru, that wage growth and supply-side pressures, such as rising energy costs, will continue to fuel rising consumer prices.
That would rule out the pivot from the Federal Reserve and European Central Bank cuts that markets expect to occur mid-year, according to Matthew McLennan.
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Federal opinion
With data indicating that price pressures may have peaked and markets expect the Fed to halt the pace of interest rate hikes, the hawkish voices have grown louder.
The Federal Reserve said that with inflation still rising year-on-year, above 7%, it is too early to abandon interest rate hike policies.
Central bank officials have pledged to keep raising interest rates until they are sure to lower the inflation rate, and the Federal Reserve’s economic expectations appear to include the assumption that inflation will pick up again by the end of this year.
Officials also expect the core inflation rate at the end of 2022 to come in at 4.8%, up from 4.5% expected in September.
ECB officials, like their US counterparts, continued their hawkish tone, with ECB Vice President Luis de Guindos saying the central bank would keep raising interest rates until expectations show that unprecedented price increases in the region are heading towards the 2% target.
De Guindos suggested discussing another 50 basis point rate hike at the next ECB meeting in early February.
Bundesbank President Joachim Nagel also stressed the need to raise interest rates, as it will take some time for inflation to begin to slow down to reach the central bank’s 2% target.
