Inflation under control? Not so fast

For the time being, 2023 will go down as the year in which central banks won the battle with inflation. However, in the past, inflation often came in waves. Argentina and Turkey are the terror if inflation flares up again in 2024.

There are few places where the champagne corks will pop louder in a few weeks than at the headquarters of Western central banks. As it stands now, 2023 will go down as the year in which sky-high inflation was quickly brought under control. In December 2022, inflation in the United States was still 6,5% and in the euro zone as high as 9,2%. These percentages (3,1% and 2,4%) are now very close to the target level of 2%. That certainly did not happen automatically. Since the beginning of 2022, the Federal Reserve has raised its policy rate in eleven steps from almost 0% to 5,5%. And in Europe that rate went up in ten steps to 4,5%.

From main topic to side issue
Partly due to that significant increase in interest rates, inflation has been relegated from a main topic to a side issue on the economic pages within twelve months. But it is by no means certain whether this will remain the case. When the oil price shot up by 30% between the beginning of July and the end of September, the financial world held its breath for a moment. Since then, oil prices have fallen again and it appears that the rise – and the resulting upturn in inflation – was a temporary phenomenon. However, history shows that it is too early to raise the flag now because the fire of inflation has gone out.

Between the ears
A good example came in the 70s. In 1973, the price of energy shot up because OPEC countries turned off the oil tap. Even after an initial shock, inflation remained high and even started to rise rapidly again towards the 80s, because wages continued to rise, among other things. That is also a danger at the moment. According to data collector Payscale, American salaries were 5,4% higher in October than last year. Plumbers, hairdressers and fitness coaches even earned 20% more. These types of wage increases ensure that inflation becomes increasingly 'in our minds'. Just as we have become accustomed to both inflation and interest rates fluctuating around zero over the past decade. There is no need to dig through the history books for examples of how painful high inflation can be.

Painful housing choice
Governor Hafize Gaye Erkan of the Turkish central bank moved in with her parents last week because high inflation made it impossible for her to find a suitable home in Istanbul. Despite raising the policy rate from 8,5% to 40% since June, Turkish inflation still hovers around 60%. In Argentina this is even more than 160%. Recently appointed President Javier Milei has already announced tough measures to put the Argentine economy back on its feet. Things won't go that fast in the Western world, but inflation could easily make a comeback in 2024. In my next column I will show how this will continue to affect currency markets in the new year.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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