Public inflation concerns could impede growth recovery

While we are in agreement with developed market central banks that the current high levels of inflation will ease (see High inflation leaves Fed with few good options), there is growing evidence that concerns over mounting price pressures are taking greater hold over the public’s imagination. This runs the risk of both perpetuating an inflationary spiral should it translate into greater demand for higher wages, but also derailing the global economic recovery through hitting demand. While supply chain issues and their impact on production have held back global economic growth to now, demand has remained fairly robust. Should this start to waver, then the pace of the ongoing recovery from the pandemic would slow.

CPI inflation, % y/y

Source: Bloomberg, Emirates NBD Research

US inflation ticked higher again in October, with price growth hitting 6.2% y/y (from 5.4% in September), and 0.9% m/m. This exceeded projections of 5.9%, with much of the upward pressure coming from higher energy prices, which contributed around a third to the price gains. That being said, core inflation also ticked higher with reopening frictions and supply chain issues still in play; vehicles prices, both new and used, were a major driver. CPI inflation in the eurozone hit 4.1% y/y in October, compared to 3.4% in September, while in the UK it is expected to accelerate to 3.9% (from 3.1% in September) when the data is released this week.

Shanghai Containerised Shipping Index

Source: Bloomberg, Emirates NBD Research

We hold to the view, shared by developed market central bankers, that much of the upwards price pressures of recent months will dissipate next year. Food and energy costs will soften and potentially even become deflationary (we forecast an average Q4 2022 Brent crude price of USD 60/b, compared with around USD 82/b today), and while the supply chain issues are harder to quantify, here too we would expect the upwards pressure to soften. Covid-related disruptions should ease, and we are already seeing a levelling off of the sharp upwards surge in the cost of shipping containers seen earlier in the year.

US Google searches on 'inflation' have spiked

Source: Google Trends, Emirates NBD Research. 'Numbers represent search interest relative to the highest point on the chart for the given region and time. A value of 100 is the peak popularity for the term.'

As long as price growth remains at these higher levels, however, the greater risk it poses to the global recovery, especially as households become more concerned around the potential impact on their finances and maybe cut back on spending as a result. Inflation is starting to percolate into the popular imagination more forcefully in recent months, as evidenced by Google trends data (which tracks the instances of particular search terms). For the US, France and Germany, the (incomplete) November data shows a surge in searches on inflation to record highs, while those in the UK are also higher compared to trend. Media stories around price growth and higher costs for everything from taxis to groceries have become commonplace, and while the use of the word inflation in books had fallen almost every year from its late-70s peak to 2019, it will almost certainly have picked up once more. The more media coverage there is around inflation, the more concerned about it people become, and this has implications for the recovery.

Univ. of Michigan Consumer Sentiment Index slumps

Source: Bloomberg, Emirates NBD Research

This was underscored last week by the release of the US University of Michigan Consumer Sentiment Index which surprised sharply to the downside in November, falling from 71.7 the previous month to just 66.8. Not only was this the lowest reading in a decade, it was also the biggest spread between expectations and reality in the past eight years by some margin. According to the survey’s director, Richard Curtin, a quarter of respondents ‘cited inflationary reductions in their living standards in November’. This has significant implications for US growth, as in the third quarter and in recent months the constraint on the US economy has largely come from the supply side, with the ships and chips issues weighing on production, in particular in the automotive sector. Our US macro scorecard for September showed a clear disparity between the demand and the production side of the economy (see US macro scorecard - September). Should this start to falter, and demand weaken significantly also, then present growth projections may prove too bullish.

Atlanta Fed wage growth tracker, 1st quartile (% y/y)

Source: Bloomberg, Emirates NBD Research

Aside from the demand issue, the heightened perceptions around price growth also have potential implications for further inflation, should a wage-price spiral ensue. According to Curtin, it was ‘lower income and older consumers voicing the greatest impact’ of these higher inflation levels, even as the first quartile (the lowest income segment) is seeing the strongest wage growth, according to Atlanta Fed data. If this is indeed the case, and given the high levels of job openings still in the US, lower income earners could come to demand still higher wages in the coming months. However, it is worth noting that this quartile also saw a sharp decline in average wage growth through the pandemic, and with other quartiles seeing weaker y/y wage growth for now (high skill wage growth is down from recent highs), the risks of a spiral do not seem pronounced as yet.