The End Of The First Wave?
After the ECB denied any inflation for at least a year, they suddenly reversed course and now talk about that inflation. According to several ECB members, there’s a danger that the ECB is underestimating future inflation. Quelle surprise!
In the annual meeting of the American Finance Association, executive board member Isabel Schnabel, according to the Financial Times, said:
“While in the past energy prices often fell as quickly as they rose, the need to step up the fight against climate change may imply that fossil fuel prices will now not only have to stay elevated, but even have to keep rising if we are to meet the goals of the Paris climate agreement,”
So, finally, the ECB acknowledges what I and many others have been saying for at least half a year now. Europe’s energy policy is inflationary in itself, as it will drive up energy and production costs for businesses. And there may be another significant flaw in the EUs’ carbon emission trade system, as explained in this wonderfully written article by my favorite chicken @Doomberg:
However, I am stunned by the timing of Mrs. Schabel’s comments. For the last year, most analysts and economists claimed that inflation is not sustainable and is near its peak, but they were proven consistently wrong every month when the inflation numbers were published. After all, the December number for Eurozone inflation was at 5% annually, and if you were tracking macroeconomic data, that shouldn’t have surprised you. Although Europe lacks an actual reflationary opening like the US, I always argued that the Eurozone is following US inflation because restrictions were longer in place in Europe.
Although everything Schnabel said in the above quote is correct, in my opinion, it won’t explain this year’s inflation numbers. The price of CO2 in Europe is expected to rise gradually, and thus the spread of higher CO2 prices to other parts of the economy will be slow for now. This is something to watch in 2023 or 2024, but not this year.
Yet, with economic turmoil in China, tapering by the Fed, and a very high probability of rate hikes, the stage - in my opinion - is set for economic turbulence, and thus I suggest that US inflation has already peaked and Eurozone inflation will likely peak in the coming months and come down in Q1 and Q2.
The result will be lower economic growth, and hence lower long-term bond yields, and the fact that more and more people jump on the inflation will not stop, and 10y yields will rise big - bandwagon usually is a good indicator that we’re near the peak of 10y yields and inflation (in the US and Germany).
Over the longer term, I think inflation will stay elevated and not return to pre-crisis levels. Nevertheless, the coming economic turbulences will lead to a quick reversal of the Fed, and I expect them to ease again somewhere this year. Then you can get ready for the next inflation wave…
You can subscribe and get every post directly into your inbox if you like what I write. Also, it would be fantastic if you shared it on social media or like the post!
(All posts are my personal opinion only and do not represent those of people, institutions, or organizations that the owner may or may not be associated with in a professional or personal capacity.)