Thoughts From The Divide – The Inflation Trenches
“Making sure that elevated prices don’t become entrenched”
We are once again in the Fed blackout period, and as the Fed plays the quiet game, the hem and haw continues over inflation and rates.
Stateside, Biden went on the offensive for the Fed in a news conference on Wednesday. Admitting that covid complications have included “price increases across the world economy” that people see “at the gas pump, the groceries stores, and elsewhere”, Biden said that “given the strength of our economy and pace of recent price increases, it’s appropriate—as Fed Chairman Powell has indicated—to recalibrate the support that is now necessary”. The CME FedWatch tool, which we’ve highlighted before, doesn’t show a hike at next week’s meeting but shows a less than 10% chance that the Fed stands pat at the current Fed Funds range at March’s meeting. In terms of the latest on price pressures, while the Empire Fed and Philly Fed’s recent manufacturing headline numbers diverged, they noted “substantial” and “widespread” price increases, respectively, with the Empire Fed’s outlook on prices continuing to run hot: “The indexes for future prices paid and received both rose to record highs”.
Meanwhile, across the Atlantic, price increases continue apace. Eurozone inflation numbers confirmed the preliminary reading of 5.0%, the highest ever, and German PPI numbers followed up with an eye-watering 24.2% YoY print! What’s more, just like the scheduled price rises in the U.S. discussed here, there appears to be inflation being baked into the cake. As this article explains, in the U.K., in addition to a domestic energy costs cap “expected to rise by 50% in April”, taxes are also increasing in April. However, returning to the Eurozone, while the continent is seeing rising prices and consumers feel an “acute cost-of-living crunch”, the ECB’s Lagarde remains sanguine. Arguing that Europe is “not in a state of excessive demand” and noting that the Euro Area doesn’t see a “Great Resignation”, Lagarde contended that “we are unlikely to experience the same kind of inflation increases that the U.S. market has faced”. Bonne chance!
(P.S. Regarding the infamous contribution of mobile phone prices to inflation, British Telecom will be raising prices for most of its customers “by 9.3% following a ‘dramatic increase’ in data usage over the last few years”, starting in April. In addition, mobile phone fees may be part of the disconnect in Japan between “government data and household perception” of inflation. However, thanks to base effects, the 1.5% damper cheaper mobile put on overall prices will drop out of the data in April.)
