Why advisors can't afford to rule out central bank mistakes

The combination of demand and negative supply shocks is challenging policymakers and central banks, particularly since they’ve been used to low inflationary pressure over the last few years.

“This is generating much weaker economic growth than we expected six to nine months ago,” said Lind. “That’s coinciding with much higher inflation. I think, for the time being, central banks, particularly the Fed, but increasingly the European Central Bank, are going to focus on the inflation element of that problem, which is why they’re saying they’re going to tighten monetary policy over the next few months. They’re keen to get interest rates back up to something more neutral.”

Lind doesn’t believe the banks can completely ignore the fact that the growth numbers are starting to soften. So, while he doesn’t believe there’ll be a recession in the next year or so, he said, “I think the odds have gone up and will go up as central banks continue to tighten.”

Capital Group expects to see more reverberations of higher oil and energy prices. Given that the Russian war on Ukraine is continuing, he’s also expecting more supply disruptions from Russia. That could have a significant risk for the European economy, and further impact prices, particularly food, pushing up inflation as well as weakening European economies. He said gas rationing, particularly for heavy industrial users, may be necessary.

“It would be temping to say, maybe this will last for a few months, and then we can go back to normal,” said Lind. “But, this is likely to be a long term structural change.”