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Scale Of Inflation Overshoots Expectations

One of the biggest challenges for central banks at the moment is simply the scale of the inflation overshoot that has been seen, particularly in the U.S. and increasingly in Europe, says Robert Lind, Capital Group’s economist. Speaking at it ‘Mid-Year Outlook,’ he said this is challenging central banks because it’s “something that none of them predicted. They are only partially really understanding why inflation has overshot as much as it has.” Still recession isn’t necessarily his base case view for the next 12 months or so. However, “the odds have gone up and will go up as central banks continue to tighten and we see the reverberations of higher oil prices and energy prices more generally, feeding through. The scale of the shocks that we’ve seen are massive, particularly in terms of energy prices, and that will result in collateral damage on other prices, such as food.” Diana Wagner, an equity portfolio manager, says some would argue that the equity market is already pricing in a recession. “I would say it’s pricing it in more aggressively for some companies than for others. So at this point, I’m looking at valuations very carefully and testing downside versus prior recessions.”

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