Week ending 12th November 2021.

WMG

This week’s focal point was Wednesday’s (10 November 2021) eye-watering 6.2% US CPI inflation reading.

You need to go all the way back to November 1990 to remember US inflation this high. As an aide-mémoire, Margaret Thatcher was the UK’s Prime Minster and George Bush senior was the US President; and US (and global) inflation rose sharply due to a surge in the oil price following Iraq’s invasion of Kuwait.

And of course, the sharp rise in the oil price we have seen since its coronavirus-induced collapse in April 2020, coupled with supply-chain disruptions, have been the main contributors to the current higher inflation readings – hence why we have been warning in these commentaries that inflation readings over the coming months are going to be eye-watering!

Although we fully expect inflation will continue to rise in the coming months, we also continue to believe that this inflation spike is transitory and higher interest rates aren’t the answer.

In fact, as oil price distortions pass through the year-on-year inflation calculations and as shutdowns and stoppages due to coronavirus outbreaks become a thing of the past, supply-chain disruptions and bottlenecks will ease, we wouldn’t be surprised if this time next year, we are talking about the potential for disinflation or even deflation – hence why we believe higher interest rates would be a policy error.

Unfortunately, in the meantime the current inflationary pressures will continue to hurt consumer sentiment and disposable spending (and the consumer makes up a large part of the global economy – for example, here in the UK consumers account for around 60% of the UK economy), which could slow the economic recovery.

Looking ahead to the week coming we have lots of key data releases including the Empire State manufacturing survey; UK employment data (unemployment rate and weekly earnings); UK and Japanese CPI; US, UK and Chinese retail sales; US and Chinese industrial production; US housing data; and Eurozone and Japanese Q3 GDP.

The Investment Management Team