July 2, 2022
  • July 2, 2022

Column: Inflation warnings are mostly “just in case”

By on June 9, 2021 0

Gas prices are seen after the US consumer price spike in April, with a measure of core inflation exceeding the Federal Reserve’s 2% target in Beverly Hills, California, States United, June 2, 2021. REUTERS / Lucy Nicholson

As the big names in the investment world rush to warn of long-absent inflation to come, financial markets seem increasingly calm about the risks of this new regime.

Is the fear of post-pandemic inflation already over?

Thursday will likely see the United States register the highest rate of consumer price inflation in 13 years – just under 5% – and the fastest rate since 1993 if food and energy prices are reduced.

Still, bond and equity markets have been dynamic for weeks – seemingly comfortable with the Federal Reserve signaling this to be temporary and may even mark a spike in distorted “base effects” measured against the downside. prices as the pandemic hit a year ago. The past 12 months of COVID-related disruption has led to bottlenecks and labor market distortions that may linger a bit longer, but policymakers believe these will ease as well.

Echoing this mantra from major central banks, the World Bank said on Tuesday that the 1% jump in global inflation expectations for this year would not justify a policy change as long as inflation expectations remain under wraps. And US market-based measures of the latter, although at their highest level in years, have been declining for weeks – well below peaks of more than a month ago.

The boiling commodity markets, both affected by and also the source of many of these base effects and bottlenecks, are also showing signs of peaking – or at the very least a pause.

Additionally, liquidity analysts argue that massive annualized money supply growth rates, central bank printing, and fiscal spending in support of locked-in economies are already declining rapidly – another reassuring argument that we are already. surpassing the “peak of inflation”.

Yet while this is true, the markets also appear incredibly Zen amid alarms raised about a more lasting end to decades of structurally low inflation – due to demographics, declining globalization, shifting mandates. central banks and even the carbon purge to fight the currency climate.

That’s a lot of convincing inflation arguments to contend with – which complicates the puzzle and raises the question of whether calls to “The Great Reflation”, “New Nominal” or “Roaring Twenties” are already the overwhelming consensus. and their price.

Some investors believe it is simply too early to tell and that the markets are reluctant to bet the farm on an unprecedented horizon that cannot be predicted with precision.

“There should be a dramatic pause here. Because nobody knows it,” said Jim Wood-Smith of Hawksmoor Investment Management, adding that few market or investment professionals who are currently working have seen anything but the falling inflation expectations over the past four decades.

And while this is an honest assessment of doubts, it doesn’t make sense for central banks to rush to unplug now – having equated their political support at a war footing in the face of the biggest shock to the world. global economy since the 1940s.

BATTERY OR FACE?

Despite all their catchy red flags, investment banks only hedge their bets to some extent.

Deutsche Bank economists said this week that their central scenario was that the resurgence in inflation would be temporary and benign. But in a new series called “What’s in the Tails?” they said they felt compelled to warn about the risk of their predictions being wrong.

“We are witnessing the most significant shift in global macroeconomic policy since the Reagan / Volcker axis 40 years ago,” wrote David Folkerts-Landau, Peter Hooper and Jim Reid of Deutsche, adding that they fear the new The Fed’s average inflation target does that too. act slowly if necessary, leading to a later and more severe tightening and a deeper recession with debt distress.

“It’s scary to think that just as inflation is deprioritized, fiscal and monetary policies are coordinated in a way the world has never seen,” they said. Given the scale of debt accumulated during the pandemic, “neglecting inflation leaves global economies sitting on a time bomb.”

Others already have a new inflation regime as their baseline scenario.

Pascal Blanque, investment director at Amundi, Europe’s largest asset manager, reaffirmed last week his central conviction that we are going back “to the 1970s” in terms of supply shocks sowing a mixture of inflation and soaring growth and much higher interest rate volatility.

One of the reasons he cited is the public, political and decision-making desire for higher inflation.

Larry Fink, managing director of the world’s largest asset manager, BlackRock, also touched on a 1970s theme by warning that inflation could be the result of another massive energy-related disruption and asked if people would now accept this as a price for a precipitous exit from carbon.

“If we rush and our solution is only to get a green world, we’re going to have much higher inflation, because we don’t yet have the technology to do all of this to make it equivalent to cheap hydrocarbons,” ” he said.

However, “ifs” and “but” s are not predictions. And inflation expectations below 2.5% on the 5- and 10-year bond market horizons show that current CPI impressions are still seen as a failure over time.

Morgan Stanley, for his part, speaks of a US CPI lower than the already high consensus forecast over the next three months, advising clients to “dissolve the hysteria” and warning that lower than forecast inflation may well be the ” painful trade ‘of the year.

The author is editor-in-chief for finance and markets at Reuters News. All opinions expressed here are his.

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