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The case for a higher-inflation regime
Robert Lind

Financial markets are convinced headline inflation rates will fall sharply towards central bank targets over the next two years, with stable expectations in the medium to longer term.

Five-year forward inflation swaps, for example, are pricing in CPI inflation of around 2.5% in both the US and the eurozone.

2.5% CPI expected in US and eurozone

2.5% CPI expected in US and eurozone

Forecasts shown for illustrative purposes only.
Source: Bloomberg

But Capital Group economist Robert Lind believes markets could be underestimating a potential shift to a higher-inflation regime, as a result of structural loosening of fiscal policy, a shift in bargaining power to workers, and trade fragmentation.

While Lind says central banks are likely to maintain their tough rhetoric, he explains in this paper why they may have to accommodate structurally higher inflation, as the costs of getting it back to target will be too onerous.

Robert Lind is an economist with 36 years of industry experience. He holds a bachelor's degree in philosophy, politics and economics from Oxford University.

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