When policy meets reality

“Transitory” is fast becoming code for complacency. We know much of the current inflation shock is driven by specific factors that will dissipate, but price developments beyond these sectors are becoming more pronounced. Furthermore, there are other demand and supply factors that will continue to exert upward pressure on prices. Many of these are driven by structural factors that were not present in the pre-Covid economy. This leaves central banks well behind the curve, a gap that is likely to widen before they react. That is bad for bond markets. Risk assets are equally vulnerable to such an adjustment. We remain long the US dollar versus the euro and the yen.

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