Inflation persuasion

The year had barely begun when European Central Bank chief Christine Lagarde suggested that by the summer, inflation would be tame enough to allow interest rates to start falling. Back then, market bets priced in a high chance that the Federal Reserve would act even sooner. Almost half a year later, the sun is out and summer is in full swing as policymakers meet for their annual retreat in the Portuguese town of Sintra. US borrowing costs remain as high as they were, and while they have indeed been reduced once in the euro zone, no one is confident enough to say that inflation has been defeated. That was very much the tone that Lagarde struck in her opening speech on Monday evening. "We are still facing several uncertainties regarding future inflation, especially in terms of how the nexus of profits, wages and productivity will evolve and whether the economy will be hit by new supply-side shocks," she said. "It will take time for us to gather sufficient data to be certain that the risks of above-target inflation have passed." Her Belgian colleague Pierre Wunsch offered similar caution. Speaking to Bloomberg Television, he backed another rate cut so long as inflation stays near 2.5%, but said that anything more than that would require "strong indications" that it's heading down toward the 2% goal. The main source of doubt, according to Chief Economist Philip Lane, lies  in whether underlying price pressures are lurking in services. Speaking just before today's release of numbers for June, he already ruled out the prospect of a quick answer in time for the ECB's July 18 decision, declaring that "these data do not settle that." In truth, the report might even present policymakers with mild discomfort. It showed that headline inflation did slow in June, to 2.5% — as expected — but that the underlying core gauge remained higher at 2.9%, defying forecasts for a slight weakening. Some reassurance is still on offer in Sintra. The first presentation today was a paper by Giorgio Primiceri, a professor at Northwestern University, and Domenico Giannone at the International Monetary Fund, whose study found that getting prices under control amounts to an "easy last kilometer" for the ECB. "Inflation is heading back to target according to the model," the authors wrote. "The last kilometer does not seem particularly risky or hard, absent unforeseen disturbances."  But attendees in Sintra will need more persuading — and not only those from the ECB. Joining Lagarde on today's policy panel are Brazilian central bank chief Roberto Campos Neto — who has just had to douse speculation of imminent rate hikes — and Fed Chair Jerome Powell, who last month  unveiled higher forecasts for inflation, and dialed back projections for cuts this year. We often talk about the world deglobalizing, a process that's accelerated after the US-China trade war and pandemic. Now, a group of economists can quantify it, creating an index for measuring geopolitical fragmentation. They use 14 indicators, including FDI ratio and number of trade restrictions, to find that the world is the most fragmented in the past few years than at least 1975 and that the trend hurts the global economy.  Their paper also highlights that the effects are worse for emerging-market economies and that the negative effects are tough to reverse quickly: While fragmentation has an immediate negative hit, the benefits from reversal take longer to play out.