Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Comic: Spooked by Inflation

EconomyMar 02, 2021 14:39
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Investing.com

By Geoffrey Smith

Investing.com -- Global financial markets got a fright last week, as the specter of inflation rattled its chains loudly at investors and central bankers around the world.

It’s easy to see why: global commodity prices were surging, with copper hitting its highest in 10 years and crude oil roaring back to its highest since pandemic went global a year ago. A violent distortion of consumer spending patterns has pushed prices for certain goods up, exacerbated by disruptions to global supply chains.

In the U.S., the new administration of Joe Biden, with the perennially dovish Janet Yellen as Treasury Secretary, is rushing through a $1.9 trillion stimulus package, while the Federal Reserve is printing money at a rate never ever seen during the 2008-9 Great Financial Crisis, $120 billion a month. In the Eurozone, the European Central Bank is still talking of a potential need to speed up a quantitative easing program that, while radical by regional standards, is barely half the Fed’s.

Coupled with that, there have been the first stirrings of inflation consumer price indices, with the Eurozone’s inflation rate heading back above zero, and Brazil’s rising for an eighth straight month to 4.6%, its highest level in nearly two years. India’s inflation rate peaked at over 7% in November before a much-needed easing in food prices brought it back down to just over 4% in January.

The inflation specter would have you believe that the historically loose policies of central banks around the world are simply paving the way for wholesale currency debasement. That someone is prepared to pay over $50,000 for a piece of computer code suggests that trust in the ability of the dollar to keep its purchasing power is not exactly unshakeable.

However, the reality of inflation – as with ghosts in general – is that it doesn’t exist. At least not in any form that threatens to destabilize the world economy.

Federal Reserve Chairman Jerome Powell spelled it out bluntly in two days of testimony before Congress last week: with 10 million fewer jobs in the economy than a year ago, the amount of slack is still enormous. As analysts at TS Lombard point out, this year is going to be about a recovery in services, which generally pays less than manufacturing. As such, the creation of new jobs will depress average hourly earnings growth, which is a key forerunner of inflation. TS Lombard’s bean-counters see core inflation at 1% late this year, and only picking up to 1¾% by the end of 2022.

Inflation in the Eurozone is even more of an illusion: the currency union had already undershot the ECB’s inflation target for a decade even before the onset of the pandemic. The CPI is now back at 0.9% almost entirely due to the end of a pandemic-driven cut in Germany’s VAT rate, tweaks to its national regime for carbon pricing and the absence across the region of January sales (another result of pandemic driven distortions of consumer spending patterns). Analysts at ABN AMRO estimate that core inflation actually fell in February to 1.2% from 1.4%.

As much as they love a good ghost story, in their hearts, bond investors know this. Eurozone bond yields turned smartly downwards after ECB board member Isabel Schnabel said last week that the ECB would respond to any unwarranted sell-off in bonds with even bigger interventions to keep yields down. The Reserve Bank in Australia similarly smacked bond bears who dared to question its commitment to keeping yields down, sharply ramping up purchases of three-year and 10-year bonds over the last week.

In Brazil and India, where memories of inflation are fresher and food prices in particular have a bigger role in the national economic debate, it does seem that central banks are going to have to work harder to stop an unwanted rise in bond yields. The 10-year benchmarks of both countries have hit 12-month highs and continue to rise.

But even here, analysts see worries as largely overblown. JPMorgan analysts led by Bruce Kasman point out that recent volatility as “exacerbated by concerns over a repeat of the (Emerging Market) financial instability during the 2013 taper tantrum.”

“We do not think EM economies are vulnerable in the same way they were in 2013, in part because there is little sign of overheating and external imbalances are virtually absent this time around,” Kasman wrote to clients last week.

In Shakespeare, the murdered Banquo appears at MacBeth’s feast as the visual expression of MacBeth’s guilty conscience. In the same way, the ghost that many investors saw last week can be seen as the expression of an uneasy awareness that last year’s profits were made possible only by extraordinary policy support, rather than their own investing acumen.

Sooner or later, reflationary policies will find traction, albeit without causing anything like the runaway inflation of the 1970s. At that point, questions about interest rates will have more validity.

As TS Lombard’s analysts put it: “It looks odd to be simultaneously expecting an upsurge of inflation and pricing stocks on the assumption that interest rates will be negligible for ever.”

https://www.investing.com/analysis/comics

Comic: Spooked by Inflation
 

Related Articles

Investors await Fed's take on inflation worries
Investors await Fed's take on inflation worries By Reuters - Jun 16, 2021 1

By Tommy Wilkes and Pete Schroeder (Reuters) -World stock markets hovered near record highs on Wednesday as investors braced for any signs the Federal Reserve is preparing a more...

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (2)
rusty largo
rustylargo Mar 02, 2021 15:34
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Governments just change their own measures of inflation as it appears, simply making us all see that we pay more, but according to them, we are paying less... and us sheep just keep on believing that...and somehow,  meanwhile we are all getting poorer...strange thing that? If there's no inflation then Mars has a liveable oxygen supply
Antonio Ba
Antonio Ba Mar 02, 2021 15:11
Saved. See Saved Items.
This comment has already been saved in your Saved Items
There’s literally no evidence of inflation. Median housing price up over 10%, commodities and raw materials at record high as measured in USD, but hey - there’s no inflation whatsoever.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email