Rate cuts and election-year spending spree could fuel stagflation risks.

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With 30 major central banks poised to slash rates and over 70 nations heading into elections, the global economy braces for the most coordinated easing since the Great Financial Crisis.

Thirty major central banks are expected to cut rates in the second half of 2024, a year when more than seventy nations will have elections, which often means massive increases in government spending. Additionally, the latest inflation figures show stubbornly persistent consumer price annualized growth.

In the United States, headline PCE inflation in February will likely grow by 0.4%, compared with a 0.3% rise in January, and consensus expects a 2.5% annualized rate, up from 2.4% in January. This is on top of the already 20% accumulated inflation of the past four years. Core inflation will likely show a 0.3% gain, according to Bloomberg Economics, which means an annualized 2.8%, building on top of the price increases of the past years.

Thirty central banks easing and seventy national governments increasing spending in an election year means more fuel for the inflation fire in a year in which money supply growth has bounced significantly from its 2023 lows.

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Central banks ignored monetary aggregates when they shrugged off the risk of inflation in 2020, and now they are, again, easing way too fast when the battle against inflation has not finished. Furthermore, the only real tool that central banks have used is hiking rates, because different parallel measures of money growth, including reverse repo liquidity injections, have kept money supply growth at an elevated rate even when the balance of the G7 central banks was moderating, albeit at a slower pace than announced.

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Cutting rates may come too late because, by the time it is implemented, it will cause a double negative. Government deficits will be cheaper to refinance, bloating an already record-high public debt yet again, but those cuts may have little impact on small and medium enterprises and families because they suffer significantly more from the accumulated effects of inflation, which means weaker margins, more difficulties to make ends meet, and impoverishment.

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