The world has moved from globalization to segmentation.
Specifically, we have gone from a world of globalization where goods were flowing over borders, people were moving across borders, and the rules for businesses were predictable and harmonized across countries.
In the new world, economies, markets, and policies are more segmented. Tariffs and geopolitical considerations limit the flow of goods. There are more restrictions on immigration. Countries have different industrial policies, which have made the rules for businesses more unpredictable and idiosyncratic.
The consequence of moving from a global economy to a segmented economy consisting of many separate “islands” is permanently higher inflation everywhere. Imported goods are more expensive, domestically produced goods are more expensive, less immigration makes domestic labor more expensive, and different industrial policies in different countries reduce competition.
The bottom line is that globalization was putting downward pressure on inflation. Segmentation, or deglobalization, is putting upward pressure on inflation.
For markets, the conclusion is straightforward. An increasingly segmented global economy is putting structural upward pressure on inflation in goods markets and labor markets, which will keep interest rates structurally higher for longer.
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