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.
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