It started after the Govt in 2020, especially in the oil and metal rally, where prices of various commodities fell sharply after 10-15 years.
After some fluctuations in 2021, prices began to rise at the beginning of the new year. In addition to this cyclical increase climatic events affect agricultural production; Distribution disruptions due to epidemics and more – all of which contributed to the pressure on prices.
In the United States and other developed economies, many government policies to help citizens with the epidemic have led to higher cash flow for households, especially as cost options for the epidemic have been lower and house prices have plummeted. This cash flow was used to some extent to buy real estate. Therefore, many components of the consumption / inflation basket saw price rises in the second half of 2021.
Many central banks have estimated that the supply crunch that will cause part of this inflation will ease over time and inflation will be temporary. As inflation persisted, it proved to be the most promising trade of all.
These trends were accelerated by the escalation of tensions between Russia and Ukraine earlier this year, culminating in a full-scale war at the end of February. Before the real war on land, the prices of many commodities, from crude oil and natural gas to aluminum, palladium, nickel, potash to wheat and cooking oils, had already risen by 20 to 30% since January 1st.
This has accelerated since the real conflict began. In addition, there are new obstacles to shipping and supply chains and agricultural production cycles in Ukraine and Russia, which will lead to production shortages.
According to inflation figures released in several major economies over the past few days, we will look at how this has affected various countries in the latter.
India: Inflation Leaks Beyond Commodity Types … Affects Demand
India’s headline CPI reached 6.95% per annum (y / y) in March 2021, the same period last year. This is an increase of 0.96% (m / m) for the month, i.e. in February 2022. This is the highest after November 2020.
Food and beverages (more than 60% of the price) and vegetables (11.6% y / y), which make up half of the 7.5% y / y index, make up 9.4% of the index overall.
Not surprisingly, the UN FAO’s global food price index rose 13% m / m in March, a record high amid restricted supplies (Russia-Ukraine war) and adverse weather conditions. A survey by Local Circles shows that 24% of Indian households have reduced consumption, while 67% are paying more by cutting costs and savings, as cooking oil prices are 50-70% higher than before Govt.
However, inflation extends beyond directly descriptive types such as cooking oils. For example, the prices of clothing and footwear are rising by 9% per annum, and many services such as health, transportation & telecommunications, and entertainment have also seen annual inflation of 7-8%. All this shows that inflation is getting stronger.
The high wholesale price index (WPI) inflation, which has been 13-14% for several months, has not really turned into that high consumer price inflation because manufacturers are still trying to keep up. Prices rise again due to sluggish demand. However, in view of the recent runway increase in commodity prices, they are not much preferred and consumer prices for manufactured goods have started to rise.
Optional expenses will be deferred as consumers will have to pay higher fees for food and other daily necessities.
The impact of fuel prices on this figure is unknown because those hikes took place recently. Fuel prices not only have a direct impact on the household budget, but are also reflected in the high prices of most goods and services over time because they have transportation components. The impact will be felt in April.
In our view, inflation in India is expected to increase in the next few months before the onset of the core effect (when the comparable period becomes the period of high inflation in the previous year). This will affect the demand for various commodities besides the upward pressure (already visible) on interest rates and the downward pressure on the Indian rupee.
United States: Non-food and fuel inflation begins to moderate
US CPI y / y real 8.5% (forecast 8.4%, previous 7.9%)
US core CPI (excluding food and fuel) y / y true 6.5% (forecast 6.6%, previous 6.4%).
US CPI m / m real 1.2% (forecast 1.2%, previous 0.8%)
US Core CPI m / m true 0.3% (forecast 0.5%, previous 0.5%)
Reaction: U.S. Treasury bonds rose 6-10 bps as the curve was perpendicular to a softer CPI than expected; The US Dollar Index (DXY) measures the US dollar against a basket of other currencies, which initially traded up 0.3% to 100.3, a 2-year high.
While core inflation was high, consensus came down to the fact that major inflation, excluding food and fuel, home food (1.5% m / m) and energy (+ 11% m / m) were the main culprits.
Prices of used cars and trucks fell by 3.8% m / m in 2021 due to supply restrictions on new vehicles, which is a good sign.
However, the contribution of housing inflation, which measures household costs, will be sticky (+ 0.5% m / m, 5% y / y) due to the backward effects of rising rents (see this sheet for more details) and weight (33). %) Even if the mortgage rates are 5.1%.
Overall, inflation is likely to stick to more than 2% (which includes significant changes to the central bank’s monetary policy and its rate hikes), indicating that we are in or near peak inflation in the United States. The food and energy gains seen over the last 1-2 years can rarely be sustained without the destruction of demand, and the underlying effects will act quickly.
Elsewhere, according to the NFIB Small Business Survey released today, 31% of business owners find inflation to be their number one problem, with the largest share since the first quarter of 1981 turning concerns about “labor quality” into the No. 1 problem. This study points to broader issues related to the ability to overcome inflation, as inflation will not be a problem for businesses if growth / demand is strong.
United Kingdom: Inflation and inflation expectations are both alarmingly high
UK CPI y / y true 7% (forecast 6.7%, previous 6.2%) – 30 year high
UK CPI m / m true 1.1% (forecast 0.8%, previous 0.8%)
UK Core CPI, Net of Food and Fuel, y / y Real 5.7% (forecast 5.3%, previous 5.2%)
UK Core CPI, Food & Fuel Net, m / m True 0.9% (Advance – 0.8% earlier)
As the City UK Inflation Surprise Index revolves around its all-time high, the headline and key CBI is higher than expected. Motor fuel prices have risen 9.9% since February, the biggest increase in 31 years.
Market indirect rates (i.e. inflation expectations) indicated by inflationary changes in the UK are set to inflate to 9.6% over the next 1 year (Note: In April, energy bills are set to rise 54% to 1.8 points per capita rate) and gradually decline to an average of 5% over the next 5 years. Will be. Long-term inflation expectations, as indicated by the 5-year forward 5-year inflation rate, are higher than year-round and currently stand at ~ 4%, more than double the Bank of England target of 2%. The breadth and intensity of inflation have really accelerated to alarming levels (see image below). Big retailers like Tesco have already issued profit warnings in the wake of this.
The table above gives the percentage of items from the types of inflation calculations that fall into each inflation group. Thus prices increased by 25% in the measured categories and by an additional 10% in inflation.
Germany: Heads towards historically high inflation
The German title CPI has been 7.3% y / y since 1981, while the 2.5% m / m print is the largest since October 1952 – primarily food and energy (formerly food / energy 0.6% m / m and 3.4% y / y). . Commodity inflation dominated by 4.8% m / m and 12.3% y / y vs 0.4% m / m and 2.8% y / y, respectively. Meanwhile, WPI recorded another record high of 22.6% y / y and 6.9% m / m.
Germany has traditionally been the inflation hawk almost 100 years ago due to the country’s boating with high inflation.
This time, however, it stopped raising interest rates for a long time, but apparently such historically significant inflation has now put pressure on bond earnings in the EU as well.
Here’s how 10 year Treasury bonds have moved across the EU from January 1 to date (bps denotes 100 basis points = 1 percentage points)
Germany: + 90bps to 0.79%
France: + 107bps to 1.27%
Spain: + 110bps to 1.72%
Italy: + 120bps to 2.39%
UK: + 83bps to 1.82%
Poland: + 240bps to 5.90%
Hungary: + 227bps to 6.67%
Czech Republic: + 110bps to 4.10%
Globally, inflation will continue to be the most watched macro variable this year, which in turn will be a key factor in the move by central banks to move interest rates from the Reserve Bank to the central bank. Ratio changes are a major determinant of ratings in both stock and fixed income markets. This will be the place to see.
(Harsh Shivlani also contributed to this section)