Markets Pray for a Goldilocks Economy

Not too hot, not too cold? Not likely.

Overly-hot wage increases keep central bankers awake at night. This is how inflation expectations get embedded into economic behavior. It is devilishly hard to prevent a self-perpetuating spiral, where increased living costs lead to ever higher-demands for salary improvements.

Average hourly earnings can, in normal times, comfortably hover a bit above the Federal Reserve's 2% inflation target. But the number has been running at more than 5% for over a year. Until this crucial measure comes back under control, the Fed can't stop hiking interest rates.

Stagflation looks like the most likely outcome, at least for the first part of this year.

Marcus Ashworth and Mark Gilbert Bloomberg 3 januari 2023

US market is more overvalued than in 1929, 1973 and 2007

Not exactly the Goldilocks scenario is it?

Merryn Somerset Webb FT 28 December 2021

Perhaps the biggest of macroeconomic importance is resurgent inflation and the seeming end of the era of cheap money

If sustained, this would qualify as a mega-trend that fundamentally changes the way finance, the housing market, and much of the rest of the economy operate and interact.

I should begin with a qualification; in real terms, interest rates haven't risen at all, but because of soaring inflation they have plunged yet deeper into negative territory. 

Indeed, relative to inflation, money has rarely been cheaper.

Jeremy Warner Telegraph 28 December 2022


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