Inflation: Transitioning from Dovish to Hawkish

Inflation: Transitioning from Dovish to Hawkish

Global Inflation Rates: A Snapshot

Inflation has become a central topic in global markets, with growing speculation about whether it is transitory or permanent. Major questions are being raised about how supply constraints and the timing of central bank interventions will affect inflation in different economies.

Here’s a look at inflation across some of the key economies (YoY, as of June, May, Quarter 1):

• Brazil: 8.35%
• Russia: 6.5%
• India: 6.26%
• United States: 5.4%
• Canada: 3.6%
• United Kingdom: 2.5%
• South Korea: 2.4%
• Europe: 2.3%
• Australia: 1.1%
• China: 1.1%
• Japan: 0.2%

US Inflation Dynamics

In the US, inflation hit a 13-year high at 5.4% in June 2021, largely driven by significant increases in vehicle prices and fuel costs (both up ~45% from last year). The supply chain disruptions, especially in car manufacturing, and fuel price recovery from 2020’s lows, are the primary contributors. The big question remains: how long will car price inflation last, and what other obstacles are preventing production recovery?

The US Federal Reserve’s Position

The Federal Reserve has maintained that the current inflation spike is transitory—a temporary issue driven by supply constraints. Fed Chairman Jerome Powell has repeatedly emphasized this stance, even though a hawkish signal emerged in June when the Fed unexpectedly brought forward its estimates for future rate hikes. While these hikes are still over a year away, this shift in tone was a significant divergence from the Fed’s usual dovish approach.

Canada and the UK: More Hawkish Than the Fed

While many central banks echo the Fed’s cautious approach, the Bank of Canada (BoC) and the Bank of England (BoE) have shown more hawkish tendencies. Both central banks have begun slowing their bond-buying programs, despite facing much lower inflation than the US.

Why More Hawkish?

Speculatively, the more hawkish tone from Canada and the UK could be explained by several factors:

• Permanent Inflation View: The BoC and BoE might believe that the current inflationary pressures will last longer than the Fed expects.
• Inflation Control Concerns: These central banks may be less confident in their ability to control inflation if it gets out of hand.
• Sensitivity to US Moves: Given that the US Federal Reserve holds a major influence over global markets, the BoC and BoE may be adopting a more aggressive stance to compensate for the Fed’s historically dovish approach.

Looking Ahead

The broader question remains: will inflation be transitory or permanent? Central banks around the world are grappling with this dilemma. As inflationary pressures persist, the shift from dovish to hawkish tones could define monetary policy for the near future, with markets eagerly awaiting the decisions of major central banks like the Fed, BoC, and BoE.