The key concepts discussed in the article “The trouble with sticky inflation
Investors must prepare for sustained higher inflation
The costs of taming price rises could prove too unpalatable for central bank”

1. Inflation: The article highlights the current state of inflation in various countries, with a focus on the United States and the United Kingdom. It mentions the recent decrease in annual inflation in the US but notes that core inflation remains stubbornly high in both the US and the euro area. The persistence of inflation is seen as a concern for central banks.
2. Stock Markets: The article mentions the positive performance of stock markets, particularly the S&P 500 index, which has risen by 14% so far in the year. This rise is attributed to a resurgence in tech stocks.
3. Central Bank Choices: Central banks are facing difficult choices in response to inflation. The article suggests that central banks must balance the need to bring inflation down with the risk of inducing a recession. The potential impact on financial markets, workers, employers, and pensioners is highlighted.
4. Rising Interest Rates: The article points out the potential consequences of rising interest rates, such as mortgage rate increases that can impact homeowners. It also mentions the challenges faced by the Federal Reserve in managing inflation through rate hikes.
5. Secular Forces: The article discusses the secular forces that may contribute to rising inflation, including disruptions in supply chains due to geopolitical tensions and increasing demands on government spending.
6. Evading Trade-offs: The article proposes the possibility that central banks may seek to evade the trade-off between high inflation and recession by accepting higher inflation levels of around 3% or 4%. This approach is compared to the concept of “opportunistic disinflation” from the late 1980s.
7. Volatile Financial Markets: Higher sustained inflation would bring about significant changes in financial markets, potentially causing volatility and challenging investors’ expectations. It could also affect companies’ ability to manage costs and prices and impact various asset classes.
8. Winners and Losers: The article discusses winners and losers in the context of higher inflation. It mentions the transfer of wealth from lenders to borrowers, the impact on bond investors, potential strains on financial relationships, and the effect on defined-benefit pension schemes and retirement benefits.
9. Central Banks’ Reputation: The article raises concerns about the potential damage to central banks’ reputations if they fail to meet their inflation targets consistently. This could lead to a loss of credibility and difficulties in guiding expectations and controlling inflation.

Overall, the article highlights the complex challenges and potential consequences associated with managing inflation and making choices in the current economic climate.

https://www.economist.com/leaders/2023/06/22/investors-must-prepare-for-sustained-higher-inflation