The Bank of England forecasts inflation will peak at 5 per cent in April. Isabel Schnabel of the European Central Bank said in November that inflation had, likely, already reached its summit. Janet Yellen, the US Treasury secretary, has been less precise: she simply said it would start to fall some time in the first quarter. The Federal Reserve has not tried to predict the timing of the turning point but policymakers forecast inflation for the whole year will be roughly 2.6 per cent, compared with around 7 per cent for 2021. If these central bankers are right, then for much of 2022 inflation — the economic bugbear of last year — will be fading away.
That only presents a different challenge. Last year, central bankers could justify inaction on the basis that some inflationary pressures would prove temporary and the global economy was still recovering from its pandemic-induced recession. To an extent, this year’s figures are likely to prove them correct — even if their forecasts of the peak are out by a few months, or possibly percentage points. In part, the central bankers will have a statistical quirk to thank. Higher headline inflation last year reflected comparisons with the worst of the pandemic in 2020. The annual figures for 2022 will be compared, more flatteringly, to the price spikes in 2021 instead.
There are other one-off effects. That includes, in the eurozone, the reversal of a pandemic-induced cut in German value added tax. Even if prices for used cars and gasoline stay high, they are unlikely to repeat their extraordinary rise — in the US the two categories increased by 31.4 per cent and 57.5 per cent respectively in the 12 months to December 2021. There are tentative signs that backlogs in ports are easing while manufacturing companies report that delivery times for key components are improving.
Potentially, shortages of durable goods could even give way to gluts in 2022. The Bank for International Settlements has warned of “bullwhip effects” as a temporary scarcity of components leads to companies over-ordering and building inventories in anticipation of future problems. At first this added demand — from consumers switching spending from services to goods — increases the stress on supply chains. Eventually, however, it leads to a surplus as companies find they have more on hand than they could possibly use or their customers could want.
But just as it was wrong for central bankers in 2021 to overreact to the temporary factors boosting the headline rate of inflation, so too in 2022 they should not be misled by short-term trends holding it down. Central bankers will, instead of explaining their inaction in the face of rising inflation, need to stick to plans to tighten policy even as inflation falls. They need to do what they urged others to do, and concentrate on the details of figures rather than the headlines — sticking to the script they have set out on how to “taper” asset purchases and raise interest rates.
While so-called transitory drivers of inflation will increasingly fall away, the public’s expectations of price rises are likely to catch up with the inflation seen over the past 12 months. That could become a self-fulfilling prophecy, especially as the labour market tightens even more as the grip of the pandemic fades — barring the impact of any new variants. These factors, rather than the vicissitudes of the global oil market or the idiosyncratic issues of semiconductor manufacturers, are the proper province of central bankers. Ironically the biggest inflationary challenge for monetary policymakers will begin even as the highest price pressures disappear.