Inflation: Transitioning from dovish to hawkish

Inflation is on everyone’s mind. Not a day goes by without Blomberg Television asking me, on one of the offices 43-inch screens right in my line of sight, if inflation across the major economies, seen thus far, is:

• Transitory or permanent?
• A result of supply constraints?
• Under control? or will be under control when the time comes for Central Banks to intervene? (Otherwise stated: Will Central Banks predict the perfect time in which they should hike rates and/or cut stimulus spending?)

Inflation is not globally homogeneous, of course. Rather, it presents differently in different countries. So, with this in mind, let’s review some inflation data from the major economies around the world. It will be prudent to examine the tone that the respective Central Banks around the world are projecting.

Inflation rates (YoY), as of June*, May**, Quarter 1***

• Brazil 8.35%*
• Russia 6.5%*
• India 6.26%*
• US 5.4%*
• Canada 3.6%**
• UK 2.5%*
• South Korea 2.4%*
• Europe 2.3%**
• Australia 1.1%***
• China 1.1%*
• Japan 0.2%*

US Inflation

Inflation in the US hit 5.4% as of June 2021, its highest value in thirteen years. 5.4% may seem impressive, but don’t be fooled. Accounting for the majority of inflation are massive increases in the price of vehicles (new, but mainly used) and fuel (both up ~45% since last year), as supply constraints affect car makers globally and fuel recovers from abnormally low prices in 2020. It is almost unfair to compare fuel prices of this year to that of last year.

Moving forward, now that fuel prices are stablised (somewhat), a question we can ask ourselves is how long the inflation of car prices is likely to last and what hurdles may still exist that are hampering these production lines?

The big dog: US Federal Reserve

Knowing the primary catalyst of inflation is vehicles and fuel, The Fed position on inflation appears rational.

The narrative from the US Federal Reserve is that the current bout of inflation is Transitory. As in, it is not likely to stick around for too long. Fed Chair Jerome Powell has had to reiterate that this is The Fed’s position repeatedly during his public appearances.

Powell has done a good job in quelling hawkish sentiment for the most part. Albeit, an unavoidably hawkish announcement from The Fed came in June when it bought forward its estimate for when the next few rate hikes could occur. This announcement was taken as Hawkish because it contrasted so much with the typical messages coming from The Fed. After all, the rate hikes are still anticipated to be more than a year away.

Canada and UK more Hawkish than The Fed

Central Banks around the world are generally echoing the sentiment of The Fed. In that, they are playing it relatively safe and trying to avoid prematurely pulling stimulus or pulling back too aggressively.

However, ultimately, the tone from the other Central Banks are a touch more hawkish than The Fed. For example, the Bank of Canada (BoC) and the Bank of England (BoE) have already begun slowing their bond-buying programs by billions each week.

The Hawkish nature of the BOC and BoE is interesting because Canada and the UK are dealing with considerably lower inflation values. Speculatively, a few reasons for their respective tone might be:

• The BoE and BoC are viewing the current bout of inflation as permanent.
• The BoE and BoC are less confident in their ability to control an unwanted level of inflation.
• Or simply, global markets are far more sensitive to announcements coming out of The Fed, and thus an extra-conservative tone must be taken by Powell and Co. Comparatively, the tones of other Central Banks are then taken as Hawkish.