(Bloomberg) - The rapid subsidence of inflation reflects the likelihood that a supply shock was its primary driver in both America and Europe, according to Erik Nielsen, group chief economics adviser at Unicredit.
Speaking just days before US data that may show further progress in bringing consumer prices under control, Nielsen told Francine Lacqua on Bloomberg Television that the nature of recent pressures is becoming increasingly clear.
“If there’s one thing I take away now, it’s that the whole inflation story was more a supply shock than a demand shock,” he said. “For Europe, for sure, but also in America. And therefore we’re seeing this quite rapid decline in inflation even though the labor market is strong, and there’s still a big loss in real income in America.”
On Thursday, the US consumer price index excluding food and fuel is expected by economists to have risen just 3.8% in December from a year earlier — the least since May 2021. Last week, data in the euro zone showed another slowdown in core inflation to 3.4% — a 21-month low.
The shift in data is giving some monetary officials cause to return to how they used to set policy, said Nielsen, who formerly worked at the International Monetary Fund and Goldman Sachs Group Inc.
“We had a period because of all these shocks where the Fed and the ECB kind of threw their models away and said, ‘we can’t really figure this out, we’re all wrong about this, but inflation is too high, we have to act,’” he said. “I think at the Fed now, we’re coming back to the models a bit, which is a good thing because that means it’s more forward looking.”
With the world now permanently subject to such shocks, it’s an “illusion” that central banks can meet their inflation targets consistently, Nielsen observed, saying the Federal Reserve is more likely to tolerate overshoots than the European Central Bank, for now.
“We had 10 very lucky years, 15 lucky years, of a deflationary pressure on the world, and it seemed all so easy,” he said. “We’ll get a world with more shocks and you get these bumps along the way, and God forbid we get central banks that try to fine tune inflation numbers on a quarterly basis. It can’t be done.”
By Craig Stirling
