Ear to the Ground

April 14 2022

Inflation again took centre stage this week with the release of key data for the UK and the US. In the UK consumer price inflation rose 7% in the 12 months to March, the highest reading since March 1992. This was above the consensus of 6.7% and was driven by higher petrol/fuel costs, although there were higher readings across the board. RPI meanwhile came in at 9% for the same period, the highest reading since 1991.

This week we also saw the release of UK averages earnings data to the end of February. Over the last 12 months wages, excluding bonuses, rose by 4%. This was some way behind the 6.2% CPI reading for the same period. Wages including bonuses meanwhile rose 5.4%. With wages lagging the rise in the cost of goods and services, the standard of living for the UK consumer has the potential to fall, in particular once consumers have eaten into the excess savings which were put aside during the COVID lockdowns.

In the US meanwhile inflation rose by 8.5%, the highest reading since 1981. Higher energy and fuel costs were large drivers, along with higher food costs. As in the UK however, inflation rose across most goods and services. Even core inflation, which excludes the more volatile energy and food times, rose 6.5%. Within that figure, items excluding COVID sensitive items saw their costs rise 2.5%. Base effects accounted for a further 1.6%, with COVID sensitive items accounting for a further 2.3%.

In response to higher inflation we have seen central banks raise rates across the world this week. The Bank of Canada raised by 0.5% to 1% as expected. The central bank of New Zealand however took the market by surprise by also raising by 0.5% to 1.5%. This was the first time they have risen by this magnitude since 2000.

Elsewhere the pressure of inflation is now biting. In Sri Lanka we have seen the public take to the streets about the state of the economy and ever rising costs. Just this week it was also reported that the country had warned creditors of a possible default and suspended payments on some foreign currency debt in order to preserve its dwindling US dollar stockpile to pay for essential food and fuel imports. We have also seen unrest in Peru. At the same time, although due to COVID rather than inflation, we are seeing unrest in Shanghai, with residents in lockdown.

Whilst inflation remains a concern, the prediction is that it will rollover. Pictet/Refinitiv forecast that US headline inflation could fall to 6% by year end. Much could depend on what happens with wage inflation between now and then, along with the supply/demand dynamics for goods, services and commodities.

Whilst these are potentially shorter term issues, longer term there are analysts keen to remind us that the forces which were driving down inflation, namely debt, disruption and demographics, have not gone away. Looking at the latter in particular, research shows that the ageing of the US population shows no sign of abating. The growth and now decline in the working age population has shown a close relationship with the US Treasury 10 year yield. Will this trend reassert itself over the longer term, pushing yields back to where they once were?

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