Only a Recession Can Tame West’s Inflation, Says Adviser to UK Chancellor

(Bloomberg) — Western economies probably can’t escape inflation without a recession because their labor markets remain too tight, said JP Morgan Asset Management strategist Karen Ward.

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Speaking on Bloomberg Television on Tuesday, the former Bank of England economist who is an adviser to UK Chancellor of the Exchequer Jeremy Hunt said that such an outcome is likely because policymakers will need to keep borrowing costs high.

“Markets bought into this idea that we could have resilient growth across the west and yet all those inflation pressures would disappear on their own and the central banks could move from tightening to easing,” she told Francine Lacqua. “Sadly, I think it is going to require that weakness.”

Backing that conclusion for Ward were remarks at the US central bank’s Jackson Hole gathering last week, where officials including Federal Reserve Chair Jerome Powell stressed the need to keep tight monetary policy in place.

“The message from all of them in different ways was that we are not confident the job is done, we are not confident we are sustainably heading back toward 2%,” Ward said. “Until it’s really clear that activity is loosening the labor market, that wage pressures are easing, we cannot be convinced we are back to 2%. So that does leave us in a higher-for-longer world.”

While European Central Bank President Christine Lagarde and Powell offered few clues about their next steps at their upcoming decisions, each signaled ongoing concern about prices.

“Both sides very much worried about inflation pressures that are still emanating from the labor market, record low unemployment, and therefore wage growth staying high — and as Lagarde called it, that tit-for-tat inflation,” she said. “I think that is exactly right.”

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Markets have yet to fully adjust to the higher-for-longer rate outlook, and their surprise last week after downbeat business surveys pointed to economic weakness underscores that, she said.

“The likelihood of a recession I think is still high,” Ward observed. “That’s what’s going to get rid of inflation.”

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