Soaring Inflation Abroad and Its Impact on the US Economy

By Tim Courtney, Chief Investment Of

As the Fed continues to fight inflation in the U.S., the challenges are even more prevalent abroad. The March reading of U.K. inflation data came in higher than expected at 10.1%, despite predictions that it would drop to single digits.¹ The news came on the heels of an unexpected jump to 10.4% in February, which ended a three-month streak of declines.¹

The surprising data created a ripple effect across the globe. In the U.S., analysts immediately raised the odds that the Fed would have to increase rates at its May meeting² (and a quarter-point raise did happen).³ It also increased concerns that global central banks would need to continue rate hikes.

Although in the U.S. we’ve seen inflation decline for nine consecutive months, after a peak of 9%, the U.K. report is a reminder that inflation can be a sticky issue and we are not out of the woods yet.⁴

Several inflationary pressures in the U.S. and abroad remain, including a tight labor market. During the pandemic, we saw the workforce shrink with many people retiring or opting to work part-time. Those labor shortages mean a decrease in production of goods and services, and that is causing prices to rise.

In the U.S. specifically, there is an effort by many companies to reshore production to combat challenges with supply chains. That means, at least in the short-term, an increased cost of production. Those factors, coupled with higher levels of government spending and an increase in money supply are also contributing factors driving up inflation.

As we’ve previously discussed, elevated inflation likely means higher for longer interest rate hikes and increasing odds of a recession. The U.K. inflation data suggests global central banks will also continue with tightening policies and we will see a continued global slowdown.⁵

It is not all bad news on the inflationary front. Housing prices appear to have finally peaked and are falling slightly, albeit after a huge jump higher. The M2 money supply has also peaked and has fallen about 4% over the last year (again, after a 40% jump higher). And while we haven’t seen them yet, it is possible that productivity gains from automation, AI or robotics could spur greater supply for certain goods/services and lower prices. As we closely monitor all these factors, we should hope that inflation falls below current interest rate levels but be prepared for inflation that stays above 2%. If you have any questions, please contact your Exencial advisor.

Sources:

1. CNBC (4/19/23) — UK inflation rate surprises again with March figure holding above 10%
2. CNBC (4/19/23) — Treasury yields rise on global inflation concerns after another hot reading in the U.K.
3. The Associated Press (5/4/23) — Fed raises key rate but hints it may pause amid bank turmoil
4. CNN (4/13/23) — US wholesale inflation saw dramatic cooldown in March
5. BBC (1/10/23) — Global recession warning as World Bank cuts economic forecast

PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971.