Another month, another bout of rate hikes as both the BoE and the Fed moved their target rate higher in May. The BoE increased rates to their highest level in 13 years but the press conference was marked by economic fearmongering from Gov. Bailey, revising inflation peaks to 10% and predicting a period of economic contraction. Across the pond, rates were hiked 0.5%, the largest single move in 22 years, but again the presser was marked by caution. Powell ruled out moves of 0.75% and acknowledged that the fight against inflation will be “unpleasant.” As far as hikes go, these were dovish ones.

That dovish tone didn’t last long – shortly after the central bank meetings, inflation data reminded everyone that the road to price stability would be a long one. In the US, prices grew at a faster pace than expected (8.3% YoY), and in the EU and UK we printed yet more multi-decade highs. The numbers themselves were concerning but underlying data painted an even grimmer picture – prices in everything from rent to food, furniture to fuel, were increasing at paces far, far above target.

This news appeared to awaken something inside the central bankers of the world (finally…?), and markets were bombarded with a slew of overtly hawkish rhetoric. From the ECB we had members Knot and Villeroy state that 50bps hikes were not off the table and that July and September hikes were now highly likely. President Lagarde added to the hawkish mood by declaring that she expects rates in the bloc to be in positive territory by the end of Q3 – quite the escalation from a bank which, since 2014, has moved in 10bps increments and had negative depo rates.

Counter to Powell’s comments earlier in the month, Fed member Bullard won’t rule out a 75bps hike and supports rates at 3.5% (versus 1% currently) by year end. Powell himself also changed tact, saying that the Fed would continue to raise rates until they saw a “clear and convincing” cool down in inflation and that if this took them beyond neutral, they “wouldn’t hesitate.”

The change in stance seems at least partly driven by the growing opinion that central bankers have dropped the ball. In the UK we had MPs call out Bailey and his committee, accusing them of being asleep at the wheel and allowing inflation to become embedded. Much of this criticism is political deflection (it’s not our fault, it’s their fault) but it isn’t baseless. Inflation is becoming increasingly broad based and central banks kept conditions loose long after they acknowledged the issue wasn’t “transitory”.

This leaves us in an increasingly precarious position. Further tightening is inevitable, but it is becoming more likely that the current pricing isn’t going far enough. If global central banks do indeed have to move faster, economies will begin to stutter. Recency bias makes us all feel that “surely rates are toppy here” but it needn’t be the case – persistent global inflationary pressures could be ushering us back to a world where 4%, not 0%, is normal.