Thinkpad: The Inflation Fog
The inflation debate caught fire this week.
As U.S. data showed that annual consumer price index had risen to 4.2% and core CPI to 3%, the question being asked was—is inflation back?
To that one question, there are many answers:
- The Fed: It’s transitory.
- The Bond Bulls: We’re with the Fed. This too shall pass.
- The Bond Bears: It had to happen. We’ve been predicting it for years and even the broken clock is right twice a day. Our time is coming.
- The Equity Optimists: Even if it’s coming, inflation is good for equities.
- The Equity Worriers: No no, anything more than a little inflation is too much.
- The Monetarists: Inflation, everywhere and always, is a monetary phenomenon....and we all know what the Fed has been up to.
- The Phillips curve believers: Keep the focus on maximum employment.
Who is right? We will likely only know in hindsight. But here are a few reads we found interesting:
The first of these links the recent weak jobs report from U.S. with the inflation story. A section of bond traders asked whether the sub-par April jobs report suggests companies will need to lift wages to entice people back into the labour force. If that is the case, some version of a wage price spiral may kick in, leading to inflation.
There are others who are asking similar questions. Greg Ip, writing for the Wall Street Journal, wrote that a section of U.S. workers, for instance those in the leisure and hospitality sector, are seeing higher wages because post-pandemic pricing in these industries has settled at higher levels. If this experience is repeated across more sectors, inflation may not prove to be as “transitory” as the Fed suggests.
A completely different view emerges from Macquarie strategist Viktor Shvets, who argued that the industrial age frameworks being used to judge inflation risks are outdated. “Technology, financialisation, changes in the functioning of capital, fixed assets, intangible assets, labour—all of that implies to me that I don’t think we really facing capacity constraints at all,” Shvets said in this conversation with Bloomberg’s Tracy Alloway and Joe Weisenthal.
For those wanting to view the debate from the equity lens, this article explains the divergent views on whether inflation is good or bad for stocks.
Before we bring the conversation back home, a note to an #alsoread which came from the Bank of Canada this week. Governor Tiff Macklem took the issue of central bank policies and inequality head on. “QE can widen wealth inequality,” Macklem said in this speech.
Back home, the train wreck that is India’s vaccination policy remains the focus. BloombergQuint has been parsing the vaccine supply data for weeks. As things stand, supplies are dwindling. If you’re wondering when your turn will come, read these pieces on how quickly vaccines will be available for the 18-44 and 45+ age groups. Caution: If you post one and not the other, you’ll give your age away!
Meanwhile, the longer it takes, the more damage we bring to the local economy.
A number of economists have now cut their forecasts to below double-digit GDP growth for FY22. S&P Global has forecast growth between 8.2-9.8%, contingent on whether the virus peaks in May or later. Moody’s Investors Service has cut its forecast to 9.3% from 13.7% earlier. And HSBC’s Pranjul Bhandari now pegs growth at 8% in FY22 versus 11.2% earlier.
Not the most cheerful note to end a weekend note on? We leave you with the weekly edition of the Elon Musk show. In this week’s episode: Musk Ghosts Bitcoin, Woos Dogecoin Again.