Deutsche Bank researchers now see downside risks to their own outlook, given the likelihood of persistently high inflation and continued upside surprises.
Deutsche Bank, the first major Wall Street bank to call for a U.S. recession during the current inflation era, is now going even further out on a limb: It sees downside risks to its own outlook, given the likelihood of persistently elevated price gains and continued upside surprises. Describing themselves as “the extreme outlier on the street,” researchers at the German-based bank have an official house call for a “mild” U.S.
On top of all this is a dramatically shifting inflation psychology in which sellers are willing to pass on cost increases and buyers are willing to accept them, and the notion that even an aggressive Federal Reserve policy response will not be enough, according to Deutsche Bank. Its researchers said they would not be surprised to see the core personal-consumption expenditures price index, the Fed’s preferred measure, at 4% to 5% well into next year before receding after a recession hits.
Broadly speaking, professional forecasters and policy makers alike have proven to be consistently wrong by underestimating the persistency of inflation — particularly as measured by the headline annual rate of the consumer-price index, which hit 5% last May and has been climbing ever since. A survey by the National Association for Business Economics, conducted earlier this month, found that almost half of the 84 respondents saw just a 25% or less probability of a U.S.
The most important factor behind Deutsche Bank’s view is the likelihood that inflation will be persistently elevated for longer than expected, according to the note by David Folkerts-Landau, chief economist and head of research; Hooper; and Jim Reid, head of thematic research. They wrote that the only way to minimize the economic, financial, and societal damage of prolonged inflation is for the Fed “to err on the side of doing too much.
“What surprises us is that our house call hasn’t become consensus,” Hooper told MarketWatch. He says that one reason for it may be that persistently high inflation is a “fairly recent and sudden development.”
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