Welcome to what Goldman Sachs is calling “reflation desperation”. For policymakers and investors, this will be a nauseating and probably lengthy ride.The embarrassing reset has come about because it turns out the inflation dragon had not been slain after all, despite markets in effect calling victory over it late last year.
One punchy US consumer price index inflation reading may be regarded as a misfortune. Two looks like carelessness. Three in three months, as we have now, are impossible to explain away. The fact that the rises are small and that this is not the Federal Reserve’s preferred measure of inflation is not enough to negate the signal, especially combined with this week’s gangbusters US retail sales data.
The great bet on rate cuts — and it was enormous — is dead. At the start of 2024, the expectation was for six, maybe seven, US rate cuts this year. That felt silly even then, but it is unravelling in humbling fashion. Today markets are pencilling in one, maybe two.