Take the US retail month on month figures that were released...

Take the US retail month on month figures that were released yesterday for example, they beat consensus and were up on the prior month.

This indicates that so far higher energy costs and increases in the bank rate are so not working at getting the inflation rate back into the 2% range the Central Banks are targeting.

The likelihood of another interest rate rise in November or December has greatly increased. Just look at the jump in 2 and 10 year bond yields yesterday.

In my opinion, if the Central Banks can't get inflation back to target soon they are more likely to 'over-tighten' causing a greater chance of there being a recession. They see runaway inflation as being more harmful to the economy in the long run than job losses and a recession.

The only thing that saved the oil price in the last recession (apart from the Corona induced recession) was the Chinese economy. They are unlikely to be doing as well this time around.

I don't expect the oil price to collapse from here but I do think that we are potentially at the top of the range as to what most businesses can afford to pay and continue to be profitable. The Indian Prime Minister for example has stated that oil prices over $80 are a real drag on their economy. (Another reason that prices won't collapse is that at some stage the US will have to replenish its oil reserves which are near historic lows).

If businesses can't make a profit then the price increase is passed onto consumers who in-turn look for an increase in pay to cover the increase in costs and so the inflation cycle starts.

Central Banks in my opinion made the mistake of thinking inflation was transitory and were too slow at increasing rates. Once you let inflation run too long employees start striking and once they start receiving pay increases it gets a lot harder to reign in inflation without taking drastic measures.