Fri, 12/10/2021 - 13:22
It’s no secret that global inflation has been running wild of late. All over the world, this key economic indicator is well above central bank target rates; in many cases, it’s more than double these levels. The Fed’s reassurances that increased price pressure was only a “transitory” phenomenon are beginning to look like empty platitudes as the reality of protracted above-target inflation sets in. Of course, many of the causes of the present inflation trouble stem from the coronavirus pandemic. Chief among them are unbridled central bank stimulus and restrictions-induced supply chain ruptures. However, just as mass vaccination had appeared to be bringing things under control, the Omicron variant arrived and threw everything back into uncertainty.
Eyes on the US
As the world’s biggest and most significant free-market economy, it’s natural that the US should be the focus of any evaluation of the global inflationary risks we are currently facing. US price pressure has been rising steadily since the beginning of the year, and the latest figures have it at 6.8% in annualised terms through November, a 0.6% rise from a month ago. Sadly, this is unlikely to be the end of the increases, and with no end in sight, things are now beginning to look rather worrying.
That said, Federal Reserve Chairman Jerome Powell has indicated that the deteriorating price environment is likely to prompt officials to accelerate their stimulus tapering efforts, even despite Friday’s revelation that November saw the smallest jobs gain this year. While such a move could certainly help combat inflation, it is not without its own risks. The stock market, for instance, would not respond well to the consequent reduction in liquidity, and another crash could easily derail the economic recovery. In any case, the greenback is always a good bet in times of inflation and offers a nice place to park wealth until the dust settles. As opposed to physical dollars, a more convenient vehicle could be the US Dollar Index.
Commodities in the spotlight
While rampant inflation is certainly a worldwide issue just now, some regions have been hit worse than others. And commodities-based economies like Australia, New Zealand and Canada have definitely had a much easier time of it, with respective annualised inflation rates of 2.5%, 2.96% and 4.7%. Now, this is just as much about central bank policy as it is sectoral weighting. New Zealand already has one of the highest interest rates in the world right now after raising its base rate to 0.75% this month amid further action planned for the year ahead. Canada has a similarly high bank rate of 0.5%, and its central bank is preparing its own aggressive campaign of interest-rate hikes for 2022, having already ended its bond-buying programme.
Of course, the reason these countries have a bit more leeway when it comes to monetary tightening is their strong commodities reserves. Rising inflation is always good news for precious metals like gold and silver, of which Canada and Australia both have plenty. Their rise might be tempered slightly by the lack of industrial demand, but investor interest for these haven assets will likely see net gains in the event of continued price pressure. As such, gold and silver constitute good hedges against ongoing volatility and uncertainty, particularly as Omicron threatens to become the dominant coronavirus strain.
What about China?
The place where the whole crisis began is still feeling the economic fallout of the coronavirus pandemic two years on. Its manufacturing business is yet to recover, and even domestic consumers are beginning to notice the knock-on effect of rising materials costs and ruptured supply chains. While Chinese price pressure looks absolutely normal at 1.5-2%, make no mistake that this is a major increase in a country used to near-zero inflation.
Given the frequent manipulation of such figures, a much more eye-opening indicator is the Producer Price Index, which stood at a whopping 13.5% in November. With goods costing more and more to produce for Chinese exporters, it’s hardly surprising that worldwide prices are on the up. When we add to this endemic corporate debt issues, potential delistings and enhanced risk of defaults, it makes already battered Chinese stocks appear ripe for even more falls in 2022. It might therefore be a wise idea to exit any positions in individual Chinese stocks or ETFs, or perhaps even consider shorting them outright.
Europe and the UK
Things are extremely tense on the Old Continent at present. Beyond rising price pressure and new variant fears, there’s also a serious energy crisis and the omnipresent spectre of Brexit to contend with. Both the ECB and the BOE will be looking at the latest GDP figures with concern as they head into their pre-Christmas policy meetings on 16 December.
German industrial output and factory orders are expected to show declines amid global supply-chain snarl-ups. Talk of potential lockdowns in early 2022 will only add to the economic fears brewing in Frankfurt and London. UK and euro area inflation currently stands at 4.2% and 4.9%, respectively, which, although double the regulators’ target rates, is not quite as high as elsewhere in the world. The problem is that the economic risks engendered by the energy crisis and coronavirus mean that it is extremely difficult for the ECB and BOE to take the stimulus-slashing steps required to keep a lid on price pressure.
As for rate hikes, both major European regulators have stated that such a move is “unlikely” before the end of 2022. The current uncertainty is bad news for European stocks and major currencies, leaving little else for the risk-averse to turn to. Other than potentially adding natural gas and oil to one’s portfolio as protection in case of a protracted energy crisis, that is.
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