In our last Macro Perspectives paper, the inflation debate was front and center— that hasn’t changed. But the drivers of it have. The war in Ukraine has driven energy and food prices higher, exacerbating COVID-19 supply chain fueled price spikes. Stephen Dover, Chief Market Strategist at the Franklin Templeton Investment Institute, spoke with several of our economists to get their views on navigating the volatile geopolitical environment’s impact on markets, and how the policy playbook may change based on growth and inflation expectations.
The daily news from Ukraine is heartbreaking. Beyond the mounting atrocities, the war and the sanctions imposed on Russia has sent economic ripples across the globe, including soaring commodity prices. War-related oil and natural gas shortages are pushing energy prices sharply higher, along with food prices for essentials like wheat and corn. With consumers and businesses paying more for fuel and food, governments worldwide are now tasked with managing a rapidly accelerating inflationary environment. Should countries hike interest rates to arrest inflation at the risk of slowing economic growth? While the European Central Bank (ECB) is taking a wait-and-see approach, the US Federal Reserve (Fed) has signaled that aggressive monetary tightening is in order.
With this backdrop in mind, Stephen Dover recently gathered with five of our economists to discuss the economic aftershocks of the war in Ukraine and the path ahead for central banks. Much of the discussion centered on Fed Chair Jerome Powell’s notion in 2021 that inflation was merely transitory. In hindsight, last year may now be remembered for what Francis Scotland calls the “great collision”—when a wall of expansionary demand (led mainly by US fiscal stimulus and aggressive monetary policy) met global supply shocks caused by the pandemic. Faced with spiraling prices, Francis Scotland and Sonal Desai believe today’s inflation picture is the byproduct of a meaningful policy mistake. They believe the United States didn’t need the massive fiscal stimulus of the US$2 trillion American Rescue Plan, passed in March 2021, especially because the Fed was already in full expansionary mode with monetary stimulus and the economy was already rebounding with a robust recovery.
“When it comes to supply shocks, monetary policy can’t address those directly. But it can address the second-round effects that those supply shocks produce. Like Francis, I think the 2021 US fiscal and monetary stimulus lasted way too long and laid the seeds of what could be a dangerous wage-price spiral. I also agree with John—we are not there yet.” - Sonal Desai, Chief Investment Officer, Franklin Templeton Fixed Income
However, not all our economists share this view. John Bellows began the year expecting growth and inflation would moderate by now. Few economists could have predicted Russia’s invasion of Ukraine and the global impact on commodity prices. For Michael Hasenstab, the war is a hazardous accelerant adding more fuel to preexisting inflationary trends. Gene Podkaminer thinks the war’s supply-driven shocks require different responses from policymakers; one example is state-level gas tax holidays, as demand-driven inflation is supplanted by supply-led inflation.
This is only a small piece of what has been discussed during this roundtable session. To read the full paper and learn which key themes our economists are watching closely, please visit our website.
