Inflation looks set to remain elevated in the near term, and this week’s US CPI report likely reinforces that narrative
Inflation expectations have already been on the decline since last November, yet remain at levels not seen in decades (anchored higher?)
Further out, stimulus removal and base effects become more bearish for yoy inflation rates - perhaps even a deflation scare comes later!
Could we be at peak inflation? As pricing pressures persist with near-term upside risks, the rate of inflation likely tapers going out several months. Still, global inflation readings show that we are in the midst of the hottest rate of price increases dating back to a few months during 2008 when oil screamed to near $150 per barrel.
2022 is a Different Animal
Last year featured excess stimulus and aid measures from both fiscal and monetary sources. Base effects become a bigger factor as the year of the tiger persists—the comparison to year-ago levels becomes tougher to significantly climb above. Hence, annualized inflation rates should retreat in the coming quarters.
Expectations Being Tempered
This month and next could be peak inflation hysteria. While concerns and even fears are well-grounded, inflation expectations have been in retreat since November. The US Federal Reserve’s hawkish pivot has already had its impact. The 2-year Treasury yield was a measly 22 basis points five months ago. It surged above 1.3% following an alarmingly hot payrolls report last Friday. 5-year breakevens peaked near 3.2% in mid-November but are now under 2.8%.
Too Hot to Handle?
Internationally, we can see how widespread the inflation story is. Illustrated in the feature chart below, almost 90% of countries have PPI inflation rates greater than 5%, and over 50% have CPI rates above 5%. Stripping out food and energy, one-quarter of nations have Core CPI inflation above 5%. We will get the January US CPI report this coming Thursday morning which will likely only stir up fears further.
Featured Chart: The Inflation Pandemic
Supply Chain is a Mess...Still
A factor that could keep price increases with us is the ongoing global supply chain chaos. Our flagship Weekly Macro Themes report dives into several important indicators that describe the state of the current supply chain mess. We’ll be watching these signals to see if backlog issues begin to clear in the wake of Omicron.
Beyond 2008 and 2011
As we hinted at earlier, expectations are crucial with inflation. Data suggest that people are becoming used to the idea that inflation is much higher than usual. And that it is here to stay. The G10 Inflation Surprise Index has gone off the charts—reading above 100 versus a 2008 peak near 40 and a 2011 zenith just shy of 30 (for comparison). So peak inflation fear might be here already.
Driving huge annual price increases is a tight developed-economy employment market. This factor should keep upward pressure on inflation in the coming years. The absence of global labor flows, strong levels of activity/demand, and elements of wavering participation rates (e.g., “great resignation”) are all bullish for wages. The unemployment rate among developed countries has cratered back to pre-pandemic levels.
Oil is the other member of the inflation tag-team. With WTI and Brent north of $90, yoy price increases are a whopping 64%. Base effects are going to challenge annual oil performances for the rest of the year. Moreover, if central banks continue to be hawkish and fiscal policies run tighter, that will remove a key pillar of energy price pressure.
Bottom Line: Expect inflation to continue to be hot, but further out, the rate of inflation will likely taper off due to challenging base effects and stimulus removal.
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