Another stagflation warning

Warnings of a possible global stagflation are coming thick and fast at the moment. The latest to join the fray is the independent British-based think tank OMFIF (Official Monetary and Financial Institutions Forum) in its newly-published survey of official sector (central bank) reserve managers. OMFIF's 2023 Global Public Investor surveys 75 central banks; 85% of them see inflation as one of the top three economic factors that will influence their reserve management over the next two years and 69% fear a global economic slowdown. Put those together and we have stagflation. None of the survey respondents expect inflation to "fall to target" (which for the US, UK and Eurozone is 2%/year) in the next two years. Given this expectation, gold continues to be seen by central banks as an important reserve asset; 63% of the respondents say they invest in gold for its diversification qualities and 35% to "protect against geopolitical risk."

At the start of the week the central bankers' central bank - the Bank for International Settlements (BiS) - issued a stark warning: to curb inflation and avoid the risk of a fresh financial crisis, governments around the world need to raise taxes and/or cut public spending. This will be especially unpalatable in the US and the UK. In the US, President Joe Biden's proposed federal budget for 2024 - a year in which he will face a hotly contested Presidential election - flags up a spending package of almost $7 trillion. In the UK, where 2024 will see an equally contentious general election, the government seems wedded to a state-funded rail network extension called HS2, the cost of which is estimated to have exploded from £33 billion a decade ago to around £100 billion today.

The chances of a "soft landing" - a reduction of inflation rates without creating conditions for a serious recession - are fast receding. The US economy is still robust, even though consumer confidence is at its lowest level this year. In the Eurozone, where the average headline inflation rate is currently above 6% (and almost 22% in Hungary), officials from the European Central Bank (ECB) seem committed to a path of higher interest rates no matter what. Isabel Schnabel, who sits on the ECB's governing board, said this month that "we need to keep raising interest rates until we see convincing evidence that developments in underlying inflation are consistent with a return of headline inflation to our 2% medium-term target." Underlying (core) inflation in the Eurozone is running above 5%. Interest rate cuts will not happen this year in the US, the UK, or the Eurozone. They might in 2024 - by which time it may be too late to avoid a recession.