Are we prepared for inflation storm?

In his latest policy statement, US Federal Reserve Chairman Jerome Powell commented “Inflation has risen, largely reflecting transitory factors.” The FOMC noted that “inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time” and said that “the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent.” (see here)

These comments of Federal Reserve have triggered a fresh debate on probability of imminent “hyperinflation” and a global “commodity supercycle”.

As per a recent report of Bank of America Securities (BofA) after the third week of earnings. mentions of “inflation” have now quadrupled YoY; and after last week, mentions have jumped nearly 800% YoY!

BofA analyst also concludes from the corporates’ earnings commentary that “On an absolute basis, [inflation] mentions skyrocketed to near record highs from 2011, pointing to at the very least, “transitory” hyper-inflation ahead.”

As per the recent World Bank Commodity Outlook report (see here) “Energy prices are expected to average more than one-third higher in 2021 (a significant upward revision from the October report) followed by a smaller increase in 2022. Non-energy prices are forecast to increase 19 percent in 2021 (also revised upward from October), but a modest decline is expected in 2022 as metal price increases partially unwind. The outlook is heavily dependent on the path of the pandemic, with the potential for additional upside risks if the vaccine rollout gathers pace and strong growth in the United States generates significant global spillovers. However, on the downside, the global recovery could yet be derailed by renewed outbreaks in large economies.”

Not being an expert on commodities of economics, I draw the following from the discussion on “hyperinflation” and “Commodity supercycle”

1.    Presently, the consensus is revolving around “transitory hyperinflation”. There are some technical analysts who are forecasting a prolonged bull market in commodities (commodity supercycle) but it is far from consensus.

My views are clear on this account. I strongly refute any case for a “commodity supercycle”. (see “Commodities – trade “yes”; invest “no””)

2.    Inflation and Deflation are always transitory in nature. It is primarily the job of the central bankers to manage this transition in a way that these trends do not cause significant disruption to the economy. A high transitory inflation could be easily compared to a cyclone that destroys the weak structures and trees falling on its way.

The problem occurs when the central bankers persistently refuse to use the available monetary policy tools, arguing that “it is transitory” and “this shall pass too”. This tendency weakens the markets’ faith in central bankers and raise doubt about their relevance per se.

We have also seen RBI following the same tendency. In past three policy statements, the persistence of inflation has been recognized but action has been avoided. I am sure inflation may not last much beyond FY22, but in next few months it can destroy economics of many household, businesses and eventually lenders.

One thing I am really concerned about is the “transitory” food inflation. The weather in many parts of the world has been unusually dry in past many months. Notwithstanding the forecast of IMD, I have gathered from old farmers (who forecast monsoon based on some natural signs) that monsoon may be below normal at least in North and North West India.

The global food prices are already running at multiyear highs and look good for a further move north. The recent food buying spree of China may be another indication of things to come.

 

Author: Midas Finserve

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