Financial markets believe in Goldilocks. Having become more concerned about inflationary pressures over the first five months of the year, their current consensus is that price rises in the US and other advanced economies will be neither too hot nor too cold in the years ahead.
The gap in yields between nominal US government bonds and inflation-protected bonds has settled at a little over 2 per cent for the next 10 years. As Goldilocks would say, that is “just right”, allowing a high-pressure economy to maintain robust jobs growth and a gradual normalisation of monetary policy.
But reality is messier than fairy tales. In the second quarter, prices rose at rates not seen in decades. In the US, the annualised rate of core inflation rose to 8.1 per cent, its highest level in any quarter since 1982. Across the OECD advanced countries, the inflation rate in the quarter rose to a level not seen since 1995 and even in inflation-obsessed Germany, annualised inflation increased at its fastest pace since the early 1990s post-unification boom.