Central Bankers Seek To Allay Inflation Fears

The US Consumer Price Index gained 1.7% in the past 12 monthsand economists are expecting inflation to easily surpass the Federal Reserve’s 2% target.

Expectations of an economic boom fueled by vaccinations and fiscal stimulus are stirring up inflation fears at a level not seen in years. Finance chiefs and one school of economists think the coming recovery will witness the sharpest price rises in a generation, but central bankers and another school of economists are playing down the market’s concerns. 

Monish Patolawala, CFO at 3M, cited rising costs in raw materials, labor and logistics. “We are working on pricing, and we are also working on yield to make sure we can offset as much as we can this increased pressure,” Patolawala told analysts in March. “But in the short run, we are seeing much more inflation coming in than we thought we would.”

In the twelve months to February, the US Consumer Price Index gained 1.7%, and economists are expecting inflation to easily surpass the Federal Reserve’s 2% target. In the eurozone, headline figures showed February inflation at 0.9% year on year.

A survey by Bank of America of 150 analysts across the Americas; Europe, the Middle East and Africa (EMEA); and the Pacific Rim covering over 3,000 companies, found higher-than-expected signs of cost and price pressures.

“The results suggest that inflation is already here,” BofA reported. As the market is preparing for a more expensive world, corporate bond issuers are rushing to secure as low yields as possible.

Central bankers are calling for calm.

“We are not going to be focused on blips, on not-sustainable moves,” European Central Bank President Christine Lagarde said last month. “I think we need to warn ourselves together about the fact that we will see inflation numbers go up in the course of 2021.”

A few days later, Richmond Federal Reserve President Thomas Barkin said he is not troubled by the recent sharp rise in bond yields that some see as warning of an inflation surge. “Inflation expectations have been firming. That’s a good thing, not a bad thing, so long as they don’t get out of whack.”