(Bloomberg) — Team Transitory has not given up hope of winning the great inflation debate.

That was the label given to everyone — from Federal Reserve Chairman Jerome Powell — who expected pandemic price spikes to be short-lived. With inflation still breaking records all over the world, they have essentially lost that argument.

But there are still many economists who say the shock will soon fade, as supply bottlenecks ease and energy costs stabilize. Some warn that central banks risk making a big mistake by raising interest rates too aggressively even as price pressures show signs of easing.

With inflation now above 8% in the Eurozone and expected to remain above that level in the US when May data is released on Friday, here is a summary of some of the main points made by Team Transitory 2.0.

Too tight?

Central banks say they can raise interest rates at a pace that allows their economies to achieve what is called a soft landing. Skeptics say they will tip their economies into recession by tightening too much, with inflation likely to undercut targets as a result.

History illustrates the risks: the European Central Bank in 2011 raised borrowing costs only to be forced to reverse them later that year, while the Bank of Japan in 2006 raised rates and had to reverse that decision in 2008.

Read more: Fed’s subdued inflation forecast needs explaining: Bill Dudley

Inventory Glut

Continued supply chain blockages have prompted retailers to stock up on products they need to ensure they can meet demand. With signs that consumers are becoming more cautious as interest rates rise, this now leaves a surplus of goods that will add downward pressure on prices.

Inventories rose $44.8 billion, or 26%, for companies on the S&P consumer indices with a market value of at least $1 billion, according to data compiled by Bloomberg from companies that reported their profits at the end of May. Morgan Stanley economists warn that the risk of an inventory glut is growing, particularly in sectors such as consumer discretionary and technology goods.

Housing is staggering

House prices have soared in many countries during the pandemic, thanks in part to central banks cutting interest rates to historic lows and pumping money into their economies through quantitative easing. While house prices are not always included in inflation baskets, rental costs are, and they often reflect the same dynamic.

As inflation took off in 2021, borrowing costs began to rise to tame it. There are now signs that property prices are falling. Global real house price growth slowed to an annual rate of 4.6% in the last quarter of 2021, from 5.4% in the previous three months, according to the Bank for International Settlements. In real terms, they estimate that global house prices are 27% above their immediate average levels after the global financial crisis, suggesting ample room for correction. As interest rates rise, consumers’ repayment burden will also increase.

China effect

China’s slowdown, driven in part by new Covid restrictions, will be a deflationary shock to demand across the global economy. This is more likely to feed through to commodity prices as Chinese purchases of everything from industrial metals to agricultural products and energy are reduced.

Bloomberg Economics calculates that a 1 percentage point slowdown in Chinese industrial production can reduce global oil prices by up to 5 percentage points. China is the world’s biggest buyer of iron ore, and it accounted for 40% of global copper demand in 2020 and up to 30% for nickel, zinc and tin.

The example of Japan

Japan is the world leader to experience a long deflationary recession and has seen many false dawns when the hoped-for return to inflation could not be sustained. It is too early to tell if this time will be different. Consumer prices recently hit the Bank of Japan’s 2% target, pushed by soaring energy prices, but limited wage gains continue to keep consumers nervous. And the BOJ remains determined to stimulate the Japanese economy, believing that the current inflation spike is transitory.

“I expect the world to move back from historic inflation to disinflationary and deflationary pressures,” said Takahide Kiuchi, an economist at Tokyo’s Nomura Research Institute and a former BOJ board member. “Inflation will come down at the cost of tighter monetary policy and an economic slowdown. Price developments will ultimately be driven by the global potential growth rate, which is weakening due to the pandemic and the situation in Ukraine.

Well anchored?

Economists at the Peterson Institute for International Economics have identified a change in long-term inflation expectations, partly due to better central bank policy, as one of the reasons why US prices have remained subdued for a much of this period.

“The public expected that inflation, although jolted in the short term by shocks, would in the longer term return to its low and normal level,” they wrote. “That expectation, in turn, has almost certainly helped stabilize real inflation.” And they noted that even after a year of soaring prices, long-term inflation expectations are not much higher than they were a decade ago.

Meanwhile, bond investors have lowered their inflation expectations in recent weeks.

Basic effect

Some of the current inflation spike has been amplified by so-called base year effects. Essentially, inflation was high when year-over-year price changes were measured against a period earlier in the pandemic when economies stagnated and costs fell. But soon they will instead be measured against the current high price level – so some of this effect will reverse.

Regions like Europe that rely on imported energy could experience a bigger drop in inflation than others if the price of fuels like oil and gas were to fall rapidly.

“Commodity prices will start to pull back,” said Priyanka Kishore of Oxford Economics. “They will remain high by historical standards. But it is unlikely that they will continue to climb. It expects that by mid-2023, food and energy prices will fall 10-15% from a year earlier, which will help lower headline inflation.

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