Inflation continues to be the economic story that just won't go away. After that brief respite in late 2023, we've seen prices creeping up again across major economies - not at the alarming rates of 2022, thankfully, but enough to keep central bankers up at night and markets on edge.
I was at the grocery store yesterday and noticed chicken prices are up again - about 8% from this time last year by my rough calculation. It's those everyday experiences that make inflation more than just an economic abstraction for most people.
The causes are complex and interconnected. Supply chains have improved but aren't fully healed. Labor markets remain tight in many sectors (try hiring a plumber or electrician without a wait!). And the massive fiscal and monetary interventions of the pandemic era are still working their way through the system.
Central banks have responded with varying degrees of aggression. The Fed has hiked rates to 5.25% and is signaling they'll stay "higher for longer" - though markets keep trying to price in cuts that never seem to materialize. The ECB has been more cautious, while emerging markets have taken more dramatic steps (Brazil's 13.75% rate comes to mind).
"We're in uncharted territory," admits former Fed economist Sarah Williams. "The policy tools are the same, but the economic circumstances are unprecedented." That uncertainty has contributed to market volatility, with equities experiencing several 5%+ corrections already this year.
The impact on different asset classes has been fascinating to watch. Real estate has struggled with higher mortgage rates, while certain commodities have performed well as inflation hedges. Gold recently hit new all-time highs, which tells you something about investor psychology.
For consumers and businesses, the challenge is adapting to this new normal. Companies with pricing power have generally fared better - luxury goods, essential services, and businesses with strong brands have been able to pass along higher costs. Those caught in the middle have seen margins squeezed.
Looking ahead, most economists expect inflation to moderate gradually rather than collapse. "We're likely looking at a 3-4% inflation environment for the next couple of years," suggests economist Robert Chen. "Not the 2% target central banks want, but not runaway inflation either."
The big question is whether we can avoid a hard landing. So far, economies have proven surprisingly resilient in the face of higher rates - but how long can that last? The next few quarters will be telling as we see whether central banks can thread the needle between taming inflation and preserving growth.
