We expect central banks to remain on the hawkish side as long as inflation expectations remain on the upside, as central banks are afraid of losing their credibility. However, the Fed and the ECB are in different positions. The Fed wants to tighten financing conditions to slow demand, as the US economy is running hot. However, the ECB is stuck in an impossible situation: Eurozone inflation is primarily driven by higher energy costs, and a central bank has few “tools” to fight cost-driven inflation without hurting growth.
Inflation is skyrocketing. We expect that inflation is now close to peaking and will start to decline in the second half of the year, but core inflation could remain elevated and surprise on the upside. In March headline inflation reached 8.5% in the US and 7.4% in the Eurozone. Indeed, inflation first accelerated because of energy prices, commodity prices and supply bottlenecks. The war in Ukraine and ongoing lockdown measures in China have amplified these inflationary pressures.
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