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Underlying inflation grew less than expected in March, second-hand car prices tumbled and real estate inflation slowed; this was all that was needed for the latest US inflation statement to end with the suggestion that inflation may have peaked. In a totally anachronistic way, we saw the reappearance of the term “transitory”, despite the fact that inflation has been high for close to a year in the US and is likely to remain so for many months to come. Nonetheless, it does look as if core inflation is treading water, despite overall CPI accelerating again due to soaring energy prices. Will this be followed by a decline? At this stage, that isn’t a safe bet.
First of all, we can’t yet call this a trend. And secondly, as inflation has been accelerating for close to a year in the US, base effects are more favourable since prices in spring 2021 were already high, whilst spring 2020 numbers were very weak. From a purely mathematical perspective, it is therefore likely that inflation will accelerate less quickly in the coming months. Yet that doesn’t necessarily mean that it can show a clear slowdown. We are certainly going to see some elements that had a significant impact on inflation a year ago settling down or even declining, as is the case for second-hand cars.
But it looks unlikely at this stage that inflationary pressure will ease significantly. In addition to the energy issue, pressure in global production and supply chains is again building, particularly due to the strong upturn in COVID-19 in China and the massive closures caused by the country’s zero-Covid policy. As an example, close to 500 cargo ships were stuck in Chinese ports last week. Whilst this renewed disruption is not having an immediate impact on consumer prices, it’s notable that production prices are not showing any signs of easing. In the US, the producer price index for final goods saw its highest rise since 1975 with a new monthly rise of 1.9%.
We shouldn’t get carried away by the relative drop-off in US inflation. Especially as this will have no impact on the Fed’s road back to normalisation, which will see a drastic tightening of monetary policy in the coming months. Its absolute priority remains to combat inflation. The European Central Bank (ECB) has also joined the Fed on this issue. Following its meeting last Thursday, the ECB clearly indicated that its priority was to stabilise prices, despite the downwards revision to the growth outlook and uncertainty caused by the war between Russia and Ukraine. Of course, if we were to see a clear deceleration in inflation in the coming months, central banks would adjust the pace of monetary policy normalisation. But at this stage, nothing suggests this, and the situation in China does not provide grounds for optimism. Everything points to the environment of inflationary pressure and rising rates prevailing for many more months. Shrewd investors will look to fully reflect this in their allocations, if this is not already the case.
Written on 15 April 2022 – Enguerrand Artaz, Fund Manager and Olivier de Berranger, CIO, LFDE