Investors must brace themselves for sustained higher inflation

At first glance, the global economy appears to have escaped a bind. Annual inflation in the United States has fallen to 4%, from double digits last year. A recession is unlikely, and the Federal Reserve has decided to take a break from raising interest rates. After a challenging 2022, stock markets have been rejoicing: the S&P 500 index of American firms has risen by 14% so far this year, fueled by a resurgence in tech stocks. However, only in the United Kingdom does inflation seem to be deeply entrenched.

The problem is that the inflation monster has yet to be truly tamed. Britain faces the most serious problem. Wages and "core" prices, which exclude energy and food, are rising by about 7% year on year in that country. Even as other headline rates have fallen as the energy shock fades, core inflation has remained frustratingly stubborn. It is higher than 5% in both the United States and the European Union, and has been for the past year. Many governments in the developed world are adding fuel to the fire by running budget deficits on the scale typically seen during deep economic downturns.