In October, inflation in the United States reached 6.2% year-on-year, a figure not seen in 30 years that coincides with supply problems, strong consumer demand and, consequently, an increase in prices. At this point, analysts move away from the transient/structural dichotomy and point to a scenario that will see rising and rigid prices appear in some sectors, while not in others.
The new data
Price growth was led by categories such as housing, used and new cars and, of course, energy, since these components have witnessed strong simultaneous restrictions on demand and supply in some areas. In a first analysis this Wednesday, BlackRock considers it likely that “inflation will remain on the high side for a while and the risks of rigid inflation persist.”
Thus, Rick Rieder, head of global fixed income investments at BlackRock, points out that “over time pandemic distortions and extreme base effects are likely to decrease, causing aggregate prices to recede towards a 2% growth rate and allowing quantities to continue expanding once supply pressures are eased, but this will not happen quickly. However, this is not a normal set of historical patterns that can be easily modeled; many inflation factors are likely to remain rigid for a while, even when the aggregate inflation metric of the PCE can normalize in the coming year.”
“It is fascinating to note that, while the supply chain interruptions we are experiencing are clearly a global phenomenon, the U.S. stands out for the dramatic way in which longer delivery times and higher prices are affecting the economy. This is likely to be due in part to the fact that the United States committed itself to an extraordinary stimulus during (and after) the acute phase of the crisis, which boosted savings, household wealth and, ultimately, an extraordinary demand for goods,” Rieder adds.
The manager considers that some cost pressures may begin to decrease in the first and second quarters of 2022. For example, the nature of the pandemic crisis, with initial blockades, social distancing and mobility restrictions, temporarily reversed a trend of more than seven decades towards greater participation of consumption in services, with a marked rebound in the share of goods in consumption.
The data does not justify a stagflation situation
“However, although many easy comparisons have been made with other historical periods of high inflation (such as the 1970s and early 1980s), and the term “stagflation” has spread quite lately, we do not believe that the data justify such concerns,” Rieder considers.
“To be more specific, in terms of rising energy costs, the lack of energy investment in recent years reflects overinvestment in the sector during the period 2012 to 2014. In fact, capital expenditure in the energy sector as part of the S&P 500 has decreased from a peak of more than 30% to recent lows of only 5%. As such, energy prices around current levels may persist or even worsen during a cold winter, but there is no structural shortage of oil, but what we are witnessing is a seasonal or perhaps cyclical phenomenon, “they add from the asset management firm.
Rieder believes that the risks derived from inflation have increasingly become a priority for Federal Reserve policymakers, since excessive accommodation for too long, or essentially making the economy warm up, could well have unintended consequences on the market that further erode confidence and eventually harm the recovery: “We were pleased to see the Fed’s recent decision to start reducing asset purchases, which will be an important evolution for policy, but our eyes (and those of those responsible of policy formulation) will focus on inflation data in the coming months.”
Julius Baer: there is no need to fear slower growth and high inflation
Shortly before the publication of October inflation data in the United States, Julius Baer analyzed the situation in two axes:
- Economic growth is slowing down due to supply constraints, while demand remains solid.
- Inflation remains largely transitory, since autonomous inflation dynamics are the exception, not the rule.
“The slowdown in economic growth that has fallen from the highest growth rates of all time in the first half of the year and, together with high inflation rates, gives the remarkable impression of stagflation. At the same time, demand remains robust, which contradicts concerns of stagnation. Strong demand in many areas and insufficient supply are in fact the main cause of high inflation. But the response on the supply side is increasingly visible,” they announced from the entity.
The U.S. labor market and inflation
The U.S. labor market added 531,000 new jobs in October and the September data were revised upwards to 312,000 new jobs. Unemployment fell and hourly pay continued to increase, although at a slower pace than in the previous month. As a result, the U.S. labor market remains quite tight, “which fuels fears that high inflation will not only be less transitory, but vicious circles between wages and prices are emerging,” Julius Baer points out.
“While a spiral of prices and wages is a clear possibility, it is unlikely to happen. Formal links in wage contracts between inflation and wage increases remain quite rare and current wage increases are, in most cases, in line with productivity growth, which reduces the pressure to increase prices due to higher wages. The risk of other types of vicious inflationary circles also remains remote, at least in the U.S. and the Eurozone,” explain the bank analysts.
“The depreciation of exchange rates due to high inflation, which leads to higher import prices, is not a problem. In addition, credit dynamics are quite mediocre, despite historically low interest rates and flexible credit conditions, which prevents high inflation from further boosting demand. Therefore, high inflation remains largely a transitory phenomenon, with some more permanent driving factors such as higher rental inflation in the future, while autonomous inflation dynamics are largely absent,” they conclude from Julius Baer.
Por Javiera Donoso