Will inflation in 2022 still be “transitory”?
The current rise in global inflation stems from two main causes: economic recovery and supply chain disruptions – how will these play out in 2022?
The world will forever remember 2020, the year COVID burst onto the scene and upended (and, too often, outright ended) lives around the world.
While it’s unlikely that 2021 will ultimately stand out so prominently in our collective memories, traders and economists might well view 2021 as the year when inflation finally resurfaced after decades of relatively stable prices in the world. developed world.
Where is inflation going?
To set the stage, inflation is reaching decades-long highs in much of the developed world:
As the graph above shows, much of the current price pressure comes from energy prices (diamonds), which have increased by 10-30% over the past year; that said, even excluding the more volatile food and energy prices, underlying inflation rates (the ‘X’s on the chart) remain well above the target range of 2-3% of most central banks.
Many global policymakers have always called price pressures “transient,” but this explanation quickly loses its luster as inflation remains stubbornly high, with little prospect of relief looming, and the potential for price increases begins. to strengthen itself for global consumers.
What drives inflation up?
The current inflationary pressure stems from two main causes: economic stimulus and supply chain disruptions.
The economic stimulus is easier to understand. In essence, everyone on the planet realized that the global economy was entering a recession from a pandemic in March 2020, and governments and central banks therefore acted quickly and aggressively to minimize the impact of the recession on their populations.
Following their mandates, central banks immediately lowered interest rates to 0% and most launched asset purchase programs to inject liquidity into the financial system. Meanwhile, governments have increased spending, in some cases sending checks directly to their citizens and offering forgivable loans to businesses to help fill the economy during the downturn brought on by the pandemic. While they have undoubtedly been effective in limiting economic damage in the midst of a global health crisis, these policies have left many consumers and businesses full of money, with little to spend.
As the economy gradually reopened in 2021, we saw consumers trigger a wave of pent-up demand, catching many businesses by surprise. Soaring demand, combined with ongoing economic restrictions in much of the emerging world, has strained global supply chains (see semiconductor chips) and logistics networks (see bottlenecks). container ships in major ports), prompting companies to raise prices on the limited inventory they were able to obtain. At the same time, due to the aforementioned stimulus payments and a general reassessment of priorities, workers began to demand higher wages, further exacerbating inflationary pressures on the supply and demand side of the economy. equation.
In this context, what will 2022 bring for inflation?
Now that we have distilled the most important inflationary drivers, we can predict whether they are likely to carry over into 2022.
Again, it is much easier to measure and project the prospects for economic recovery in the future. From a monetary policy perspective, most of the major central banks are turning (probably belatedly) to a policy of “normalization” by gradually reducing asset purchases and outright raising interest rates. These policies influence the economy with a significant lag, but at the margin, the injection of less liquidity into the financial system and the rise in interest rates should dampen demand and reduce inflationary pressures, especially since we are entering the second half of the year.
Likewise, the tailwind of previous fiscal policy is likely to turn into a headwind in 2022 as governments seek to fix their dilapidated balance sheets and address voter concerns about rising prices. Taking the United States as an example, the Hutchins Center on Fiscal and Monetary Policy predicts that fiscal policy has already shifted from stimulating economic growth (real GDP) to subtraction, and fiscal policy is expected to be a headwind in the future. foreseeable future:
While it seems likely that the stimulus component of inflation is already fading (and will continue to decline through 2022, barring any surprises), the supply chain situation is much more difficult to manage. unravel. At a high level, there is a strong incentive for capitalist economies to minimize costs and maximize profits, so from this very basic perspective, there is reason to be optimistic that global supply chains will be in a much better shape. position a year from now than they are now.
Sadly, given the damage caused by the ongoing pandemic, the path back to that lower inflation future will likely be far from easy. To take an example, experts expect the semiconductor shortage to wane throughout the year, with order times gradually decreasing as the production process “catches up” to growing demand. On the other hand, persistent logistical and transport delays have exposed the risks of “just-in-time” inventory management; therefore, we expect ‘relocation’ to be a major theme in 2022, as business leaders place greater value on the resilience of their manufacturing processes, rather than the potential efficiency achieved by relocating to the cheapest possible source and assuming a myriad of risks associated with the increase in maritime transport. costs down to outright shortages of supply. If this theme gains momentum as we anticipate, it could continue to drive prices higher in the years to come.
The last and most mysterious driver of inflation in 2022 will be consumer confidence. Already, we’ve seen the damage inflation can wreak on the psyche of global consumers (and politicians in the developed world are already starting to feel its bite, too). The longer the price pressures persist, the more likely they are to take hold as consumers speed up their purchases of goods to ‘beat’ price increases and, in so doing, cause the shortages and inflation they fear. in a vicious cycle. While we remain skeptical of fears of rampant “hyperinflation” across the developed world, there is absolutely a risk that medium to high single-digit price increases will take hold.
Impact of inflation on the markets: focus on interest rates
Rising inflation in 2021 has already had a dramatic impact on global markets, from commodities (as shown by the roughly 40% annual increase in the Invesco DB Commodity Diversified Index) to stocks (as shown the crash of many currently unprofitable growth stocks with expected profits in the distant future), but the most direct impact of inflation is on the level of bond prices or, conversely, on the level of interest rates. interest in the world.
Interest rates generally rose slightly in 2021, with a clear upward trend in rates in the first half of the year turning into choppy and limited trade in the second half. The chart below shows the benchmark 10-year sovereign bond yields for the US, UK, Germany and Australia, all showing a similar pattern:
Notably, short-term bond yields rose faster and more steadily throughout the year, particularly in the US, UK and Australia, suggesting traders believe these central banks will act aggressively (read: raising interest rates) to ease inflationary pressures.
Overall, we expect global yields to rise slightly through 2022, as most of the major central banks move more aggressively toward ‘normalizing’ their policy rates, with more central banks moving more aggressively towards ‘normalizing’ their policy rates. proactive (the BOE, the Fed and the RBA for example) leading to a greater increase in yields. than more cautious central banks (ECB and BOJ).
Even if you don’t trade interest rates directly, it’s worth understanding the general trend and macroeconomic factors involved given their close relationship to other markets including forex, stocks, and commodities.
By Matt Weller, CFA, CMT, Forex.com » Official site