Are inflation expectations ahead of themselves?

I read a great piece by HSBC Chief Economist guru Stephen King that appeared in the Financial Times this morning, “Trigger-happy central bankers risk wrecking the recovery,” *Note: We often consider things great when they are aligned with one’s own world view; which is the case here; as I too think developed world central banks have gotten ahead of themselves.]

Here are some excerpts that I think make great sense:

 Standard economic upswings end with inflation. This one is beginning with inflation.

  • Central banks typically raise interest rates to prevent inflation from picking up. They’re now thinking of raising interest rates to bring inflation down.
  • Higher interest rates are associated with rapid economic growth. Yet the west’s economic recovery so far has been arthritic, at best.
  • There are few, if any, domestic inflationary drivers.
  • Wage growth is modest.
  • Money supply growth is insipid.
  • On any conventional measure, there’s plenty of spare capacity.
  • The emerging nations’ success has, in turn, imposed a tax on western economies.
  • This “tax” is being paid via an increase in prices relative to wages. Hawkish central bankers would rather the tax be paid via higher interest rates.
  • Yet, raising rates may simply squeeze western demand without chocking off “eastern” inflation.

Today we hear and digest what Mr. Trichet has to say about “inflation” and interest rates. Hawkishness from Mr. T will likely be rewarded for euro bulls…but with US jobs report tomorrow, it could be an interesting setup…