Source: Unigestion, Bloomberg as of 1 December 2021
We have been communicating since the end of last year that inflation would be a key macro force in 2021 and drive market returns, as the post-crisis demand recovery would meet supply and labour constraints. We reiterated that it would prove more durable than central bankers expected and not simply the result of base effects.
However, heading into 2022, we believe inflationary forces will peak through a combination of slower (though still healthy) demand, a gradual resolution of supply issues, and constraints on the capacity of the economy to absorb higher prices. This does not necessarily mean inflation will fall back to the 2% target, but rather that it will ease considerably, thereby relieving pressure on the Fed to tighten too fast.
Savings rates have declined significantly, so we do not see a massive source of pent-up demand. At the same time, new capacity is being brought online and supply issues are expected to be largely cleared up in the early part of next year. Moreover, food, energy and other commodities are responsible for over half of headline inflation this year while less volatile components such as shelter and medical care grew at an elevated but more sustainable pace and only contributed 1.9% to the 6.2% y/y rise in the CPI. Absent an extraordinary surge in these core components, food and energy prices would need to see another upswing like the one in 2021 to keep inflation at these levels, implying oil trading at over 100 USD/bl. Indeed, market pricing suggests that commodity prices are set to fall in 2022, as shown in our chart, which aligns with lower demand and increased supply expected next year.
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