Investors must prepare for sustained higher inflation

At first glancesp the world economy appears to have escaped from a tight spot. In the United States annual inflation has fallen to 4%, having approached double digits last year. A recession is nowhere in sight and the Federal Reserve has felt able to take a break from raising interest rates. After a gruesome 2022, stockmarkets have been celebrating: the & 500 index of American firms has risen by 14% so far this year, propelled by a resurgence in tech stocks. Only in Britain does inflation seem to be worryingly entrenched.The trouble is that the inflation monster has not truly been tamed. Britain’s problem is the most acute. There, wages and “core” prices, which exclude energy and food, by around 7%, year on year. But even as headline rates elsewhere have dropped as the energy shock has faded, core inflation has been frustratingly stubborn. In both America and the euro area it exceeds 5%, and has been high over the past year. Across the rich world many governments are adding fuel to the fire by running budget deficits of a scale typically seen during deep economic slumps.