📝Central Banks to Keep Acting As Inflation Shock Eases: Natixis

Estimate of the inflation dynamics suggests that an inflationary shock spontaneously halves after 1.5 years in the United States and after around 1.2 years in the euro zone. This slow pace of the spontaneous decline in inflation is dangerous for the next two reasons: 1)It gives inflation expectations time to rise and destabilise the inflation dynamics. 2) It gives time for wage earners’ purchasing power to be eroded significantly.The pace of inflation’s retreat is slow. This means that if the central bank does not act to accelerate the rate of disinflation, inflation expectations may diverge. The price level has time to rise above the reference price level, leading to a loss of cost competitiveness and a loss of credibility for the central bank.

-Natixis