Vivien Lou Chen is a Markets Reporter for MarketWatch. You can follow her on Twitter @vivienlouchen.
A major Wall Street bank is warning about the risk that inflation expectations could become unanchored in a fashion similar to the 1970s stagflation era.
Inflation remains above central banks’ targets in every Group-of-7 country — the U.S., Canada, France, Germany, Italy, Japan, and the United Kingdom. How long it will remain high is one of the most important questions facing financial markets, and a destabilization of expectations would make it even harder for policy makers to restore price stability.
History indicates that the last mile of inflation is often the hardest. One of the key lessons of the 1970s was that inflation failed to return to previous levels after the first oil shock of 1973 and U.S. recession of 1973-1975, and went even higher following a second oil shock in 1979. Now that inflation has been above target for the last two years, “a fresh inflationary spike could well lead expectations to become unanchored,” according to the Deutsche Bank note.
The current period differs from the 1970s era in a number of ways, the Deutsche Bank team also points out. Long-term inflation expectations remain “impressively” well-anchored, commodity prices have fallen substantially from their peaks over the past 12 to 18 months, and supply-chain disruptions that emerged during the pandemic have “broadly healed.” In addition, the U.S. is less energy intensive than in the past and less susceptible to damage from a 1970s-style energy shock.
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Deutsche Bank warns of fresh inflationary spike that may unanchor expectationsVivien Lou Chen is a Markets Reporter for MarketWatch. You can follow her on Twitter vivienlouchen.
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