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INFLATION: LAST LONGER AND RISE FASTER
What was forecast over a year ago is now reality. Inflation rates will rise more quickly, and the rising pace will last longer, than many governments and analysts had previously expected.
Of course, now it is “official” since the 38-member Organization for Economic Cooperation and Development (OECD) warned in its final quarterly economic outlook this year of heightening risks that businesses and households must grow accustomed to ever-rising prices.
For G20 countries, the OECD raised its 2022 inflation outlook to 4.4 percent from the 3.9 percent it had foreseen earlier, and 3.2 percent in 2023.
U.S. and U.K. inflation will average 4.4 percent in 2022, compared to the 3.1 percent it had predicted for both countries in its previous forecast, and will peak this year before settling to 3.5 percent by 2023.
Europe will see inflation averaging 2.7 percent next year, not the 1.9 percent the OECD had foreseen earlier.
The group shaved 0.1 percent from its overall 2021 growth forecast, reducing the number to 5.6 percent, but left its outlook for 2022 unchanged at a 4.5-percent global economic expansion, then 3.2 percent in 2023, the OECD predicted.
The new predictions were formulated before the Omicron variant had surfaced.
If the new COVID strain resists vaccines and spreads quickly, the world would likely see economic slowdowns and price declines, Laurence Boone, OECD’s chief economist, said in a 1 December press conference.
The OECD’s gloomier inflation was prompted by “imbalances” in the markets for workers, energy, semiconductor, vaccine supplies, and other economic essentials, the report said.
Supply disruptions subtracted 1.5 percent from Germany’s GDP this year and 0.5 percent from that of the Czech Republic, Japan, and Mexico, it noted.
The shortages “risk slowing growth and prolonging elevated inflation,” Boone said.
Governments will not be able to relieve these shortages by policy prescriptions, Boone added, and instead should work to ensure that COVID vaccines are available worldwide.
“We’ve been spending $10 trillion” to fight the COVID War, she said, “but the cost of buying vaccines for everyone would be $50 billion, so half a percent.”
“What we’re seeing now makes you think, why aren’t we doing this?,” she said.
“We are concerned that the [Omicron] strain is further adding to the already high levels of uncertainty and risks, and that could be a threat to the recovery,” she warned.
Analysts have been slow to predict the Omicron variant’s impact on the economy until the threat is more carefully assessed.
However, governments around the world have imposed new travel and other restrictions in a better-safe-than-sorry approach to the Omicron strain, again shutting down hospitality businesses, throwing people out of work, and damaging their nations’ economic recoveries.
The new strain has arrived amid a slowdown in the economic recovery, due in significant part to shortages of materials and workers and clogs and kinks in global supply chains, all of which has fueled inflation.
“In terms of forecasting, this [Omicron] aggravates the risks we already have identified, whether it be tensions in supply chains, closed borders, health checks being reinforced,” she added.
She envisioned two possible scenarios.
In one, the Omicron variant worsens current economic ills but does not disrupt the global recovery; in the other, the new viral strain weakens demand, which would threaten a global recession but also reverse inflation.
If businesses and households become used to ever-higher prices, that could ignite a wage-price spiral, Boone said, an outcome that economists and central bankers fear most because it is harder to counteract.
If Omicron becomes the dominant COVID strain, it could cut the world’s economic output by 2 percent next year, analysts at Oxford Economics said last week in a research note.
Although the global recovery is progressing, there are “marked differences” among countries, the OECD noted.
The richest countries’ economies will return to their pre-COVID strength by 2023, Boone said, aided by massive fiscal stimulus and plentiful vaccines.
In contrast, poorer countries have had few resources to use to boost their economies out of the worldwide economic crisis, have struggled to get hold of vaccines, and will live with “sizable long-term income scars,” Boone said.
TRENDPOST: It is not the massive vaccines that will generate economic growth, it will be massive fiscal stimulus. Totally ignored by the politicians, Presstitutes and the media is the fact that in many emerging markets, vaccine rates are extremely low and so are COVID deaths.
For example, as we have reported, with a bit more than 5 percent of the people of Africa being vaccinated, the World Health Organization reported that the continent of 1,385,633,300 people was “one of the least affected regions in the world.”
Comprising nearly 17 percent of the world’s population, WHO data show that deaths in poor, underdeveloped Africa make up just 3 percent of the global total. This compares to the heavily vaxxed world of The Obese Americans and “Developed” Europe, they account for 46 percent and 29 percent respectively of the global COVID deaths.
EUROZONE’S INFLATION RATE SETS RECORD IN NOVEMBER
Inflation among the Eurozone’s 27 member countries averaged 4.9 percent in November, year over year, setting a record as energy costs, ongoing supply-chain disruptions, and lockdowns against a new COVID variant all pushed prices up.
The rate blew through economists’ expectations for a 4.5-percent price hike.
The previous record was 4.1 percent, set in July 2008 and matched this year in October.
Inflation in Belgium and Spain in November ran at 5.6 percent, Spain’s highest rate since 1992.
“This is clearly not a short-lived shock,” Paul Hollingsworth, PNB Paribas’s chief European economist, told The Wall Street Journal. “It’s lasted a lot longer than people had expected—and the longer inflation stays at these elevated levels, the greater the chance that it starts to feed through to the mindsets of households and businesses,” he warned.
When inflation becomes a long-term expectation, it can spark a wage-price spiral, in which the two chase each other ever higher.
Despite inflation remaining well above the European Central Bank’s (ECB’s) target of 2 percent, the bank has said it will not raise interest rates at least through next year, leaving them in negative numbers, where they have been for seven years.
That decision is driven, in part, by expectations that Europe’s economic productivity will sag in 2022’s first quarter, and perhaps beyond, as new COVID-related lockdowns curtail manufacturing, travel, and shopping.
Still, inflation will continue to exceed the ECB’s 2-percent target next year, according to the Organization for Economic Cooperation and Development (see related story in this issue).
Inflation across the continent could rise even higher if the COVID virus prompts extended or widespread lockdowns in China, resulting in greater shortages of manufactured goods around the world, the WSJ noted.
Much of Europe’s current inflation is the result of fuel shortages, especially of natural gas, which drove energy prices 27.4 percent higher during the 12 months ending 30 November.
Energy prices are expected to drift lower after the winter heating season, pulling inflation’s rate down with them.
However, inflation has begun to creep across Europe’s service sector, prompting fears that price pressures are becoming more deeply embedded in the region’s economy.
The new figure places even greater pressure on the ECB to justify its decision to hold interest rates below zero through at least 2022.
The ECB has tried to calm public fears about inflation by attributing price hikes to singular, short-term factors such as supply-chain glitches and Europe’s energy price spike this fall.
November’s rate of inflation in Europe will “prove to be the peak,” Isabel Schnabel, an ECB board member, said last month in a 30 November public statement, adding that “there is no evidence to suggest that inflation is spiraling out of control.”
“There is little doubt that inflation will fall next year,” Andrew Kenningham, a Capital Economics analyst, told the Financial Times. “The only debate is how far and how fast.”
Holding to that view, ECB president Christine Lagarde maintained in late November that it would be “wrong” to raise interest rates now because inflation will begin to cool by the time the new rates would have a chance to impact the economy.
Between 50 and 60 percent of Europe’s inflation pressure has come from high energy prices this fall and there is “reason to believe that by the end of 2022 it will have declined significantly,” Lagarde said.
Inflation is peaking, she also said in comments cited by the FT. “I see an inflation profile that looks like a hump…and a hump eventually declines,” she said, repeating that the ECB is “very unlikely” to alter its interest rate— which has remained negative for seven years—in 2022.
Once inflation stabilizes at the bank’s target rate of slightly above 2 percent, the ECB “would not hesitate to act” and increase interest rates, she said.
Others aren’t having it.
“It may be wishful thinking on the part of Lagarde when she declares that price pressures won’t run out of control,” Charles Hepworth, investment director at GAM Investments, said to the FT.
“They already are and it’s difficult to follow the argument that they will abate soon,” he added.
Luis de Guindos, ECB’s vice-president, seemed to give a little ground in a 30 November interview with Leos Echos, a French financial newspaper.
“In 2022, bottlenecks may last longer than expected,” he admitted. “There’s a risk that inflation will not go down as much or as quickly as we expected.”
TREND FORECAST: The ECB faces two bad choices: to raise interest rates and risk an economic slowdown or even recession, or to leave rates where they are and let inflation have its way with the continent’s economy.
Lagarde’s vow to leave rates untouched is an attempt to keep markets from crashing in the short term, while Guindos’s qualifier gives the bank wiggle room if it changes its mind later.
With supply-chain clogs expected to last well into next year’s first quarter and shortages of workers and key materials extending deep into 2022, the ECB will be forced to raise interest rates next year.
The changes will be incremental, no more than 25 basis points at a time, but will come more regularly as markets try to accustom themselves to the medicine.
GERMANY’S INFLATION RATE REACHES 29-YEAR HIGH
Inflation in Germany roared at 6 percent in November, year over year, a pace not seen since 1992 when East and West Germany were reunited after the Cold War.
Energy prices drove the higher rate, soaring 22 percent. Food prices rose 4.5 percent, services 2.8 percent, and rents bumped up 1.4 percent.
The rate raises stirs memories of Germany’s hyperinflation following the first and second world wars, when prices soared by triple digits and destroyed incomes, savings, and businesses.
“Inflation gives rise to legitimate concerns,” Christian Lindner, Germany’s new finance minister, tweeted last week, adding “in the case of currency devaluation, we’ll observe how it develops” after the COVID War ends.
TRENDPOST: Inflation running at 30-year highs in Germany, as it is in Spain, puts even more pressure on the European Central Bank to raise rates sooner than 2023 (see related article in this issue).
HIGH INFLATION HITS HOUSEHOLDS HARD
Once upon a time, not too long ago, the Bankster Bandits were spewing out the bullshit that inflation was only temporary. Then, after moving higher at faster rates, they said there was still nothing to worry about because it was only “transitory.”
Then, in the last two weeks, from the Fed-Head Jerome Powell to Janet Yellen, the Secretary of the U.S. Treasury (who was a former Fed-Head), they reversed their bullshit and now say inflation is real and not going away soon.
Plantation Workers of Slavelandia
Indeed, some 45 percent of American households say they are experiencing varying degrees of financial hardships due to inflation, with lower-income individuals reporting the highest level of difficulty, according to a recent poll from Gallup.
The U.S. consumer price index rose 6.2 percent in October from a year ago, which is the highest it’s been in 30 years. And much of the country is bracing itself for higher heating bills during the winter months. These bills are expected to jump about 54 percent. The median rent in the country also increased by 17.8 percent from January to November, The Washington Post reported, citing the Apartment List’s National Rent Report.
The Gallup poll found that 71 percent of households making less than $40,000 a year have said the recent increases have caused a degree of financial instability for their families.
The poll said 47 percent of middle-income homes and 29 percent of upper-income households have also felt the pinch. (See “COVID WAR: RICH GOT RICHER, POOR GOT POORER,” “COVID TAKES TOLL ON POOR & MINORITY COMMUNITIES” and “SPOTLIGHT: INFLATION SPREAD.”)
The Gallup report found that most Americans are not facing a crisis due to these increases but nearly three in 10 from lower-income households have said the “hardship is severe enough that it is affecting their current standard of living.”
Gallup polled 1,600 people from 3 November to 16 November. About 1 in 10 said that the hardship was significant enough to impact their standard of living. Thirty-five percent described their hardship as “moderate.”
“Most low-income households are already hurting,” Mohamed Younis, editor in chief of Gallup, said, according to the Post. “You can only imagine what that’s going to look like in the next few months if this continues to get worse.”
TREND FORECAST: The greater the supply chain jams which are not expected to ease until next year, the higher inflation will rise. Also pushing up supply chain worries are the lack of truckers and concerns that overworked laborers at snarled ports may start to rebel, thus causing the jams to last longer.
However, the deeper the economic decline, and should oil price remain under $80 per barrel for Brent Crude and gas prices weaken, inflation will ease downward.
And as we note, the Federal Reserve Bank of Atlanta reported that “The GDPNow model estimate for real GDP growth in the third quarter of 2021 is 2.3 percent on October 1,” which is a steep drop from 2 August when the forecast was for 6.3 percent growth. Thus, considering the overall stressful economic conditions, the “Biden Bounce” that we had forecast back in January would happen—but be temporary—is coming to an end. (See “THE BIDEN BOUNCE, THE WORST IS YET TO COME” )