If we did not already have enough with the biological virus Covid-19 and its mutant versions, in this 2021 an economic virus called inflation has appeared that no less than forty years ago it was not so strengthened. Inflation, that is, the rise in prices has spread throughout the world, reaching 6.8% in the United States, 4.9% in the euro area, 5.2% in Germany in November or 6.7% for Spain in December –the highest interannual rate since 1992–. And going to more exotic places rises 11% in Brazil, 21% in Turkey, 8% in Russia or the record of 1,197% in Venezuela.
This rise in prices, according to the economist Juan Ignacio Crespo, has placed real rates (nominal rates discounting inflation) in places never known as the case of one-day Fed funds at -6.63%, or US 10-year bonds at -5.4%, a level only seen and surpassed at the end of the two World Wars and in times of stagflation (inflation without economic growth).
The cause of the rise in prices has a lot to do with Covid-19 and the problem of production bottlenecks with a supply unable to meet demand with semiconductors or vehicles as prominent examples. To this, and for similar reasons, the brutal rise in energy prices (oil, natural gas …) and all its repercussions on production have been added. Covid-19 brought the stoppage or reduction of many activities that have not started in time when the improvement has arrived.
The Austrian fund manager Erste AM estimates that the inflation rate in the fourth quarter of 2021 will be around 5% in the world for developed economies and at the end of 2022 it will be between 2% and 2.5%. Although it warns of two dangers for a significant drop in prices: the less deflationary pressure that China has exerted in recent years due to a certain deglobalization of the economies and the aging of the population that reduces the number of employable people and could cause wage increases. From the asset management giant BlackRock they point to another inflationary element: the energy transition. “An orderly transition to zero emissions can encourage inflation, but not as much as a disorderly transition or no climate action at all,” they say.
“The risk of inflation is greater than what the central banks admit”, point out from the manager Muzinich & Co. “Some of the inflationary factors are transitory, such as energy; others are more durable, such as supply chain disruptions, while some could be more resilient, such as housing costs, structural reorganization of supply chains, inefficiency of labor markets, the impact of change climate in food prices and the cost of the energy transition “, they explain.
From S&P Global Ratings they are more optimistic: “More than half of the rise in inflation is due to energy prices (27.4% at one year, 16.7% at two years), mainly due to supply factors. Stopping the rise in oil prices and many governments’ tax cuts on gas and electricity bills starting next year will significantly reduce inflation in 2022 ”. In addition, they rule out that wage inflation will rise soon.
For their part, analysts at the US bank Goldman Sachs are concerned about underlying inflation – which does not include fresh food or energy – and they predict that the United States will close the current year at 4.4% and the next at 2%. ,3%. For the euro area, they expect a year-end at 2.5% core inflation that will drop to 1.2% by the end of 2022.
A concern maintained by experts, despite their downward price forecasts, are the so-called second-round effects, the clearest exponent of which is the rise in wages so as not to lose purchasing power. From Renta 4, its director of analysis, Natalia Aguirre, points out that these effects are controlled: “The excess capacity in labor markets in Europe limits the price-wage spiral, although in the US there are more tensions, and there are also factors deflationary structures such as automation, globalization or demography, among others ”.
A vision about wages that worries Joaquín García Huerga, director of Global Strategy at BBVA Asset Management, who sees much higher inflationary risks in the United States than in Europe: “Only by comparing wage growth can we have an idea in this regard with rise of 4.5% year-on-year in the US compared to slightly less than 2% in the euro area ”, he adds. “If we assume that the US economy internalizes some of the current trends as structural, our core inflation forecast would rise from 2% to 3% by the end of 2022,” he concludes.
This month of December has been enlightening about the monetary policy steps that both the Federal Reserve (Fed) and the European Central Bank (ECB) will take next year to curb inflation far below the 2% annual growth targets. The Fed expects up to three rate hikes for 2022 after accelerating the withdrawal of its monthly stimulus program at the rate of cutting it by $ 30 billion through March. For her part, Christine Lagarde, president of the ECB, will raise her ordinary debt purchase program (APP) to 40,000 million euros in the first quarter and 30,000 million in the second. One way of counteracting –according to Bankinter’s research service experts– the abolition since April of the pandemic emergency bond purchase program (PEPP).
The pulse of central banks when taking measures such as the withdrawal of stimuli or rate hikes – they are not expected in the euro area until well into 2023 – will be decisive for what happens in the markets during 2022. From Goldman Sachs they are resounding: “Investors should not be too cautious in markets with rising inflation, as long as the central bank responds credibly.”
Chris Iggo, Head of Large Investments at AXA Investment Managers points out that the worst case scenario would arise if central bankers decide to crush inflation. “Real returns would increase and economic growth would respond negatively”, although he clarifies that “this is a possible result, but we have to wait and see a little more about the data that are emerging.”
In this inflationary environment during the first part of the year, experts are clearly opting for the stock market as the best form of investment and expect another black year for bonds that will not start to be interesting until 2023. Goldman Sachs analysts indicate that inflation it favors real assets such as stocks, real estate, raw materials … over bonds, except those linked to inflation. As for equities, “those who benefit the most from inflation are energy companies and those with the power to set prices and protect profit margins. We are overweight banks that tend to be the biggest beneficiaries in an environment of rising inflation and rates. ” And finally, large-cap US stocks stand out for strong pricing power and continued efficiency gains. Bankinter expects a bullish stock market in January and a volatile market until confirming the drop in inflation.