Source: Zhitong Finance
Zhitong Finance APP has learned that the “Inflation Temporary” (Team Transitory) has not given up hope of winning the inflation debate. Many, including Federal Reserve Chairman Jerome Powell, expect the price surge caused by the outbreak to be temporary. Later, as inflation raged around the world and hit record highs, they largely abandoned the idea. Still, many economists now believe that the inflation shock will fade soon as supply constraints ease and energy costs stabilize. Some of them even warned that even if prices showed signs of peaking, central banks risked making a big mistake by raising rates too aggressively.
With inflation in the Eurozone now over 8% and the US due to release May data on Friday, inflation is expected to be above that level, here are some of the main points recently made by the “inflation tentative” (i.e. Team Transitory version 2.0).
Monetary policy too tight?
Central banks claim they can raise rates at a pace that will ensure a soft landing for the economy. But skeptics say that even if inflation could fall below target as a result, overly tight monetary policy will tip the economy into recession.
Such risks have been seen in history: the European Central Bank raised rates in 2011 only to be forced to change measures shortly after that year, while the Bank of Japan raised rates in 2006 only to have to cancel it in 2008.
Robin Brooks, chief economist at the Institute of International Finance, recently tweeted:
“A global recession is imminent. The European Union’s gauge of consumer confidence in the euro area has returned to the lows seen in early 2020 when the outbreak first emerged. Meanwhile, China’s GDP is set to fall in the second quarter, and rising U.S. mortgage rates are driving U.S. real estate The market has slowed sharply…”
excess inventory
Continued supply chain hurdles are prompting retailers to increase inventory to ensure they can meet consumer demand. There are signs that consumers are becoming more cautious in their spending as interest rates rise, potentially leading to a glut of goods, adding downward pressure on prices.
Inventory at consumer companies with a market value of more than $1 billion rose 26% to $44.8 billion, according to results released by publicly traded companies at the end of May. Morgan Stanley economists warned that the risk of excess inventory is growing, especially in areas such as consumer discretionary and technology products.
“Sister Wood” Kathy Wood tweeted:
“I believe Fed Chair Powell, Fed Governors, and the President are assessing more than just short-term supply chain bottlenecks that may be caused by over-ordering and are showing record stockpiles at Walmart and Target!”
housing instability
House prices have soared in many countries during the pandemic, in part because central banks slashed interest rates to record lows and flooded their economies with quantitative easing. While house prices are not always included in inflation, rental costs are, and they generally reflect the same dynamics.
As inflation soars in 2021, borrowing costs are starting to rise to keep inflation in check. There are now signs that house prices are cooling. In the fourth quarter of 2021, annual growth in real global house prices slowed to 4.6%, down from 5.4% in the third quarter, according to the Bank for International Settlements. It forecasts that real global house prices will be 27% higher than the post-GFC average, suggesting there is plenty of room for correction. As interest rates rise, so does the repayment burden on consumers.
“Doctor Doom” Roubini tweeted:
“As mortgage rates rise and the risk of stagflation increases, it’s time to address the housing bubble.”
Lessons from Japan
Japan has been through a prolonged deflationary depression, and there have been many instances where inflation is on the rise but unsustainable. It’s too early to tell if this time will be different. Consumer prices in Japan recently rose to the Bank of Japan’s 2% target, driven by soaring energy prices, but limited wage increases continue to unnerve consumers. Given that the current rise in inflation is temporary, the Bank of Japan remains committed to stimulating the country’s economy.
Takahide Kiuchi, an economist at the Nomura Research Institute in Tokyo and a former BOJ board member, said: “I expect the world to move from historic inflation to deflation, with inflation falling at the expense of tighter monetary policy and a slowing economy. Price trends eventually It will depend on the underlying global growth rate, which is weakening due to the pandemic and the situation in Ukraine.”
Well anchored?
Economists at the Peterson Institute for International Economics found the shift in long-term inflation expectations, partly due to improved central bank policy, was one reason U.S. prices remained subdued for much of this period.
They noted: “The public expects that, even if there is a short-term shock, inflation will return to a normal low level in the long run. In turn, this expectation will help stabilize real inflation. Even if the price surge persists for a year, long-term inflation Expectations are not much higher than they were ten years ago.”
Meanwhile, bond investors have been lowering their inflation forecasts in recent weeks.
American economist Paul Krugman tweeted:
“The market has taken notice: Implied inflation expectations over the medium term have fallen. Some Fed officials have already mentioned this change.”
cardinality effect
Some of the current inflation spikes are magnified by the base year effect. Essentially, inflation is high when compared to prices in the early days of the pandemic when the economy stagnated and costs fell. But soon, inflation will be measured against current high price levels, so some of those effects will reverse.
If the prices of fuels such as oil and natural gas cool rapidly, inflation in regions such as Europe, which depends on imported energy, could fall more than elsewhere.
“Commodity prices will start to fall back, they will remain high by historical standards, but are unlikely to continue climbing,” said Priyanka Kishore of Oxford Economics. She expects food and energy prices to be higher than last year by mid-2023 That’s down 10% to 15% over the same period, helping to lower headline inflation.
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