Inflation Battle Reaches 'End of the Beginning' — Says Societe Generale Economist: CNBC

Central banks are at “the end of the beginning” in their fight against inflation, according to Societe Generale economist Kokou Agbo-Bloua. Despite the headline figure gradually approaching the Federal Reserve’s 2% target, the core consumer price index (CPI) remains persistently high, CNBC reports.

Factors Keeping Core Prices High

Agbo-Bloua attributes the persistence of high core prices to several factors, including government spending to maintain the economy during the pandemic, supply chain disruptions, and companies’ ability to raise prices more than warranted. He also notes the tight labor market and lower labor productivity growth pushing unit labor costs.

See Also: CPI Preview: Will Weak Inflation Data Provide Further Relief to Markets?

Recession to Tame Inflation?

Agbo-Bloua suggests that central banks may need to trigger a recession to combat inflation effectively. He believes that the impact of monetary policy tightening often lags the real economy by around three to five quarters. However, the excess savings built up during the pandemic and companies’ ability to repair balance sheets have helped keep the labor market resilient, likely extending this lag time.

Recession in the U.S. Expected in Q1 of Next Year

Agbo-Bloua predicts a recession or slowdown in the U.S. in Q1 of next year due to the cumulative tightening. He doesn’t foresee a recession in the euro area, expecting more of a slowdown but not a recession. He suggests that the recession in the U.S. will likely begin to affect corporate profit margins that are still near record levels, through wage growth eating into earnings.

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