Looming Inflation Surge to Pose Awkward Questions of Central Bankers

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A stack of evidence is piling up that the global economy is heading for a spike in inflation say analysts, as logistical challenges and the rising cost of raw materials converge.

Rising prices will meanwhile put central bankers under increasing pressure to explain how they will both try to keep rising prices contained and maintain a generous supply of credit to their respective economies. 

"Logistics, disruption, raw materials and Covid-19 working practices are all coming together to fuel inflation," says John Meyer, Head of Research at brokers SP Angel.

The prediction comes just a day ahead of a crucial meeting of the U.S. Federal Reserve on Wednesday and the Bank of England's Monetary Policy Report due on May 06, where policy makers will come under increasing pressure over the matter of rising prices.

"Inflation is coming whether we like it or not," says Meyer.

He says the cost of containers from China to the West has trebled while the availability of containers from China to Europe is severely restricted.

"Disruption in unloading containers in congested Western ports is adding to delays and cost," says Meyer.

Meanwhile a global shortage in chips is being cited for widespread output slowdowns in different industries, right across the global manufacturing chain.

All this points to a sharp squeeze in supply which could well push up prices at a faster rate than central banks and the major economists are expecting.

"Policy makers are likely going to stand back and let it rip through as it inflated borrowings away," says Meyer.

Indeed, the Federal Reserve and Bank of England are likely to recognise that monetary policy will prove relatively ineffective in controlling inflation generated by supply constraints, instead they can only really target inflation caused by increased demand.

Nevertheless, Meyer warns mortgage costs will need to be held back for homeowners to prevent very substantial levels of default.

"At what point will The Fed, ECB, BoJ and BoE raise rates? Questions Meyer, "wow will the bond market react to rising inflation?"

The Federal Reserve is expected to maintain a dogged line of communication at its April policy meeting that it will sit on current policy settings for many months more, in order to guarantee the U.S. economic recovery.

The Bank of England is meanwhile tipped by economists at NatWest Markets to announce it will start reducing its quantitative easing programme in May, a move seen as a necessary precursor to future interest rate rises.

Also aiding inflation rates in the near future has been a surge in the cost of commodities.

"Signs of inflation are everywhere at present it seems, with limit ups for both corn and lumber raising the prospect of higher prices feeding through to the rest of the economy in due course," says Chris Beauchamp, Chief Market Analyst at IG.

Beauchamp says the rising commodity prices will be particularly interesting for the Fed on Wednesday, although for now no change in policy is expected.

"A lack of any major change this week should continue the dollar weakness story of the past month, putting further gains for the greenback in doubt," he adds.