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The temporary inflation threat

Inflation could rise because of mismatches between the patterns of supply and demand. This would be only a short-lived problem
The temporary inflation threat

We need higher unemployment if inflation is to remain low. That’s the message of bond markets.

In the US, the five-year breakeven inflation rate is at a 16-year high despite the fact that the official unemployment rate is 2.6 percentage points above its pre-pandemic low. And in the UK, breakeven inflation is now half a percentage point higher than it was before the pandemic even though the unemployment rate is a percentage point higher.

Bond markets in both countries, therefore, are telling us the same thing – that the trade-off between unemployment and inflation has worsened. Before the pandemic sub-4 per cent unemployment rates were consistent with low inflation. Today, they are not. In the ugly jargon, Nairus have risen.

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