Supply chain disruptions caused by the outbreak and ultra-loose policy stimulus led to the fastest inflation in decades, leading central banks to raise interest rates aggressively. This has also heightened financial market fears of a global recession, which has been exacerbated by the impact of the war between Russia and Ukraine.

Hot inflation is difficult to deal with

Figures released last week showed that CPI growth in the UK and the US in March was the highest since the early 1980s. Second, inflation has spread to many countries and regions around the world, and inflation, which has become the fastest in the world in decades, has begun to deter many consumers, especially those plagued by rising food and fuel prices. About 84 per cent of Americans plan to cut spending because of rising prices, according to a Bloomberg Harris poll (Harris Poll).

And the spiral of inflation driven by rising wages is likely to continue over the next few years. Households have become less resistant to paying higher prices and companies have become less resistant to offering higher wages. Prices and wages will continue to spiral until inflation erodes incomes and causes the economy to collapse in a recession. It's like snatching chairs: everyone knows the game will be over, but they feel the need to run around the circle faster and faster, hoping to be in the best possible position-consumers deliberately buy quickly in advance to avoid the expected price rise. This situation is called "inflationary psychology". It is easy for companies to pass on higher costs to consumers, including their expected future cost increases.

In the US, for example, this is what happened in the last era of inflation from 1965 to 1982; inflation expectations seem to be becoming a self-cyclical story. Many commentators assert that the current situation is completely different from that faced in 1978-1980. This is true, but it is not appropriate. A more appropriate comparison would be five to 10 years before that period, when inflation had not yet reached crisis levels. Government officials claim that they have policy tools that can easily reverse inflation, as they now say.

However, from Johnson's surtax to Nixon's wage and price control, to Ford's public relations campaign to "control inflation immediately", to Carter's call for a reduction in material desires, these policies of successive US presidents have repeatedly failed to control inflation. Inflation did not begin to fall until Paul Volcker was appointed chairman of the federal reserve and raised the federal funds rate to 20% in 1980. He pushed interest rates sharply higher, raising them by 10 per cent in just six months; as a result, US inflation fell by 10 per cent and unemployment reached 10 per cent.

The supply disruption is said to be temporary and the rate of inflation will soon fall. But a survey by the University of Michigan confirms that supply shortages are an important factor, and these shortages have only played an initial role in raising inflation expectations. Over the past nine months, half of consumers have mentioned shortages; nevertheless, shortages are no longer associated with higher inflation expectations.

Consumers were quick to accept that there were multiple causes of inflation, citing the growth in federal spending and the Fed's expansionary monetary policy as dual drivers. During the epidemic, transfer payments and relief payments significantly increased household income. The increase in income means that household budgets can easily afford higher prices. These transfers mean survival for many families, some of which will soon run out of money. Most workers still have jobs and have increased their expenses. A large portion of these stimulus funds have been incorporated into their savings and reserves, which will constitute a more lasting factor for price increases.

Several other relevant findings from the University of Michigan Consumer confidence Survey are also relevant. Although consumers, especially those under the age of 45, increasingly expect inflation to rise, they also expect a strong job market and higher wages. In the coming year, wage increases will continue to reduce resistance to rising prices, and the ability of companies to easily raise sales prices will continue to reduce their resistance to wage increases. As a result, the basic elements of a self-perpetuating wage-price spiral are now in place: rising inflation along with rising wages.

The Fed faces the daunting task of balancing inflation and unemployment. When consumers were recently asked which is the more important issue facing the country, nearly 90% of them thought it was inflation. When consumers are asked to describe in their own words how their financial situation has changed recently, the most common complaint is that rising inflation leads to a decline in living standards. Soaring gasoline, food and housing prices force almost all families to go through a painful process of deciding what they need to buy.

Importantly, most consumers today do not experience the accelerated inflation of the 1970s. Most people have personally experienced only very low inflation and a few brief spikes in oil prices. This lack of experience magnifies the shortcomings of their response to the prevailing high inflation rate. Another key feature of the early inflationary era is that inflation often reverses briefly, followed by new peaks. The same pattern is expected in the coming months.

Most consumers want the government to take policy measures to curb inflation. In fact, the proportion of consumers expecting the Fed to raise interest rates is at its highest level in the past half a century. Given that the federal funds rate has been hovering near zero for a long time, this is not a difficult decision to make. Perhaps more surprisingly, the Fed raised interest rates by 25 basis points in March by too small to signal aggressive precautions against soaring inflation. Instead, it implies that the labour market will remain strong and inflation will continue to rise.

The global economy faces recession risk

With Fed policy as the wind, central banks around the world face the daunting challenge of tightening monetary policy and cooling inflation without plunging the economy into recession. The Bank of Canada and the Federal Reserve of New Zealand provide examples for the Fed, which raised interest rates by 50 basis points for the first time in 22 years; the Fed is likely to raise interest rates by 50 basis points next month for the first time since May 2000 and start cutting its balance sheet.

Bank of America Corporation reported that fund managers' views on the outlook for economic growth were the most pessimistic in history, while JPMorgan Chase & Co increased the provision for loan losses to avoid being affected by economic deterioration.

At the same time, the United Nations warned that developing countries would face a "perfect storm" as commodity prices soared, the World Trade Organisation downgraded its forecasts for global trade growth and searches for the word "recession" on Alphabet Inc-CL C soared. The International Monetary Fund (IMF) has said that the war between Russia and Ukraine led it to lower its forecast for this year's 143 economies, which account for 86 per cent of global GDP. "We are facing one crisis after another," said Kristalina Georgieva, managing director of the International Monetary Fund (IMF).

"for the global economy, the combined impact of war and the epidemic will be a year of slower growth, higher inflation and increased uncertainty," said Tom Orlik, chief economist at Bloomberg. For the global economy to enter a recession, we need to see more shocks. Russia cuts off natural gas supplies to Europe, which are all possible catalysts. "

But there is also reason to think that it is flexible, at least for rich countries. Households in developed markets still save 11-14 per cent of their income because of stimulus measures during the epidemic, according to an analysis sent to clients by JPMorgan Chase & Co last week.

Household leverage is at a decades-low level and incomes are growing at about 7 per cent a year amid a tight labour market, a catalyst for a possible economic rebound in the second half of the year. In the US, last week's report on retail sales and consumer confidence offered hope; despite the price shock, consumers did not cut back on spending.

"I think there are more reasons for the global economic slowdown than for re-acceleration," said Stephen Jen, head of Eurizon SLJ Capital, a hedge fund and consulting firm in London. However, whether it will fall into recession is a completely different matter, only because the weakening of epidemic prevention around the world should release huge pent-up demand to help offset a large part of the disadvantages. "

However, this robustness will be tested.

One danger is that as the economy weakens and inflation is driven by supply chain problems that monetary policy cannot solve, policymakers will shift from lagging behind inflation to over-tightening. Fund managers surveyed by Bank of America Corporation put the risk of policy failure at 83 per cent.

Karen Dynan, a senior fellow at the Peterson Institute for International Economics, said: "We expect economic growth to slow sharply because central banks need to tighten policy from the current very loose state in response to a tightening financial environment that will eventually dampen demand."

The Dynan estimates that global economic growth will slow to 3.3 per cent this year and next, and 5.8 per cent in 2021. Large developed economies will expand only moderately this year and slow further in 2023, she said. Large emerging markets face "very different" prospects, such as India's improving economic outlook.

The transient global environment this year has caught policymakers off guard. White House chief economic adviser Brian Deese said last week that the United States faces a lot of uncertainty.

Earlier, Zhitong Financial reported that Goldman Sachs Group estimated that the likelihood of the US economy contracting in the next two years was about 35 per cent. It may be difficult for the US economy to achieve a so-called "soft landing" because historically, the sharp decline in the gap between American workers and jobs has occurred only during recessions. "on the face of it, these historical patterns suggest that the Fed faces a difficult road to a soft landing," Hatzius said.

The BofA survey does not believe that a recession can cure the current inflationary ills; bond markets are also emphasizing this. The curvature of short-term interest rate futures provides one of the most accurate indicators of the business cycle. Expectations have shifted to faster monetary tightening and interest rates will be cut in the second half of next year-bond market participants believe the US recession will begin in the middle of next year; but this has not eased market inflation expectations, on the contrary, inflation expectations have quietly risen to cyclical highs.

More aggressive anti-inflationary policy measures by central banks may cause some controversy; nevertheless, they need it. Adam Smith's legendary work the Invisible hand describes how individuals act for their own interests, thus creating unexpected benefits for society as a whole. Unfortunately, the potential inflationary hand the world now faces could turn self-serving decisions into losses for the economy as a whole.