Nordea On Your Mind: The return of inflation
The narrative surrounding inflation is central to current market dynamics, especially as central banks navigate the post-COVID landscape. Per the full note , Nordea highlights the revival of inflationary pressures, attributing this shift to a combination of energy shocks and ongoing trade disruptions. Our consensus suggests a cautiously optimistic view on inflation, reinforcing the case for adaptive monetary policy strategies as markets react to persistent price pressures. Anticipate further developments in the coming weeks as inflation remains a primary concern for both policymakers and traders alike.
What the desk is arguing
The desk argues that the resurgence of inflation signals a new phase in monetary policy, necessitating vigilance from traders. Per the full note , Nordea outlines that years of subdued inflation have rapidly reversed, now prompting central banks to reconsider their strategies as inflation pressures mount.
Supporting evidence is found in the recent spikes in energy prices and supply chain disruptions. These factors have contributed to a dramatic rise in consumer prices, suggesting that inflation is not merely transitory but potentially entrenched.
Where it sits in our coverage
Our current consensus target for inflation stands at 1.075, with a range from 1.04 to 1.12. Notable targets from other firms include: - jpmorgan: 1.10 for Mar-26 - bofa: 1.04 for Mar-26
This viewpoint aligns with jpmorgan's more aggressive stance on inflation expectations while diverging from bofa's more cautious perspective, indicating that our target sits above the lower bound of the prevailing spread.
How other firms see it
Aligned firms like jpmorgan are on the same page regarding inflation's resurgence, emphasizing adaptive policy responses. Conversely, bofa holds a more divergent, cautious view.
The evolving dynamics of inflation correlate closely with related indicators such as the EUR/USD trajectory and potential ECB policy adjustments. A close watch on central bank signals and market responses is warranted as this narrative unfolds.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Inflation has returned as a critical focus for central banks following a prolonged period of low inflation.
- 02Supply chain disruptions and energy price shocks are driving the resurgence of inflationary pressures.
- 03Central banks may need to adapt policies quickly as they balance economic recovery against inflation risks.
- 04Traders should remain alert to monetary policy adjustments in response to inflation trends.
Market implications
Traders should monitor levels around 1.075, which is our consensus target, as a critical point for potential volatility. Watch how upcoming central bank communications address inflationary trends, especially surrounding monetary decisions.
Risks to this view
A reversal of the current inflation narrative could occur if major economies successfully address supply chain issues or energy prices stabilize significantly. Such developments would challenge the ongoing inflationary outlook and potentially lead to a shift in central bank strategies.
Nordea On Your Mind Nordea On Your Mind: The return of inflation 31-01-2023 The Nordea On Your Mind team is out with a new report, and this time the authors are focusing on a topic on the minds of many these days: inflation. Why is it back from the dead? Where does it come from?
How do we control it? “Hello inflation, my old friend.” Those are the opening words for the latest Nordea On Your Mind Report: The return of inflation, and the musical reference couldn’t be more fitting. Inflation is top of mind for many these days, and the Nordea Thematics duo Johan Trocmé and Viktor Sonebäck take a deep dive into the hot topic with analysis, illustrations, historical data and interviews with Nordic experts. Back from the dead For most of the past decade, in the majority of advanced economies, inflation has either been a non-issue or so low that it has become a problem, in that central banks have undershot their inflation targets.
This has led to a prolonged period of ever-more extreme efforts by central banks, including negative policy interest rates and quantitative easing (bond purchases), to raise ultra-low inflation. After years of building up imbalances, with low interest rates creating asset price bubbles, and central bank balance sheets swollen with bonds, an energy and food price shock coupled with trade disruptions has suddenly reversed the inflation trend into a swift and sharp spike. In the midst of this environment, we believe it is helpful to offer a review of what inflation is, how it works, what drives it and how it could be controlled.
What is it, and why don't we like it? Inflation can be defined as an increase in the general price level for goods and services in an economy. Policymakers measure it with a consumer price index (CPI), based on a basket of goods and services for a typical consumer.
CPIs are not identical, but very similar among advanced economies. When pursuing inflation targets, central banks tend to focus on core inflation indices, which exclude potentially volatile energy and food components. Inflation as such is not harmful, and is indeed inherent to the economy.
Nevertheless, high, volatile or unpredictable inflation can hurt the economy, particularly by making economic planning very difficult for both businesses and households. For most of the past decade, in the majority of advanced economies, inflation has either been a non-issue or so low that it has become a problem, in that central banks have undershot their inflation targets. Nordea On Your Mind: The return of inflation Where does it come from?
In macroeconomics, the Keynesian school of thought argues that inflation results from imbalances between supply and demand in the economy, while the monetarist view is that it is all about the money supply. The latter is almost universally the theoretical basis for the monetary policy of the central banks in advanced economies today. The two oil shocks of the 1970s drove more severe inflation spikes than what we have seen so far in 2022-23.
Back then, soaring oil prices drove up inflation broadly, with general cost inflation leading to a wage-price spiral, and inflation remained high until the early 1980s. The current inflation spike is driven more directly by high energy and food prices. How do we control it?
The traditional tool for controlling inflation is policy interest rates. Since the global financial crisis of 2008, central banks have also turned to more extraordinary tools, such as negative interest rates and quantitative easing (buying bonds to push down long-term interest rates), which they now wish to phase out. The current consensus view is that this temporary inflation spike should abate by 2024.
We highlight some factors that could potentially add to inflationary challenges, and encourage corporates to consider some 'what ifs' when deciding what leverage and interest rate exposure they can live with in the coming years. Insights from experts and policymakers Norway's central bank has been more pragmatic than dogmatic in managing inflation, and has not resorted to negative interest rates or quantitative easing. We asked Norges Bank Director of Monetary Policy Ole Christian Bech-Moen about the thinking behind their approach. “Monetary policy target is set by political authorities, and we have a clear and sound mandate for monetary policy in Norway.
Especially in periods of structural change and considerable uncertainty, it is even more important that monetary policy contributes to price stability and stability in the economy, ” Bech-Moen says in the interview. We naturally turned to Nordea's Torbjörn Isaksson , Chief Analyst in Macro Research and our resident inflation guru, for a crash course on how inflation works. “Inflation is a natural, inherent part of an economy, and it is a widely accepted view that a certain level of inflation is normal and desirable. A high inflation rate is usually also volatile.
This combination of rising and unpredictable prices makes economic planning difficult for households and companies,” Isaksson says in the latest NOYM report. And, to better understand how inflation is quantified and measured, we interviewed John Eliasson from Statistics Sweden. “Statistics Sweden is tasked by the Swedish Parliament to produce a consumer price index every month. There are time series going back to the 19th century, but in its current form the index data goes back to the 1950s.
The main measure is the CPI, which is a cost-of-living index,” Eliasson says. Nordea On Your Mind is the flagship publication of Nordea Investment Banking’s Thematics team, which produces research for large corporate and institutional clients. The research does not contain investment advice and typically covers topics of a strategic and long-term nature, which can affect corporate financial performance.
Top decision makers at Nordea’s large clients across the Nordic region receive Nordea On Your Mind around eight times per year. The publication’s themes vary widely, and many are selected from suggestions by clients. Examples of covered topics include artificial intelligence, wage inflation, M&A, e-commerce, income inequality, ESG, cybersecurity and corporate leverage.
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