Source: Unigestion, Bloomberg as of 26 November 2021.
Will the inflation premium continue to adjust upwards?
To answer this question, we need to analyse the contributors to the inflation surprise, distinguishing between what comes from “supply” and what comes from “demand” and separating the cyclical from the more structural. Our charts shows the contribution of the main components to monthly changes in US headline inflation between 2019 and 2021.
Two key elements stand out:
1) The most cyclical items, which are also the most volatile (food, energy and other commodities) and account for 41% of US CPI, explain most of the decline in inflation in 2020 and represent the bulk of the sharp rise in 2021.
2) More stable components such as “shelter” and “medical care” also rose more strongly than usual over the period but at a more sustainable pace.
Based on IMF growth forecasts and EIA studies, it is difficult to imagine a further increase of more than 50% in food and energy prices over the next 12 months. At the same time, an analysis of the forward curves shows that most energy commodities are in “backwardation”, even signalling expectations of lower prices for coming quarters. In addition, the US household savings rate has “normalised”, falling from 17% to 6% within a few months, thereby reducing the risk of excess demand for goods and services in the near future.
As a result, even if the other components were to grow at a higher rate than the average over the last 20 years, notably “shelter” and “medical services”, it is very unlikely that headline inflation will remain above 3% in 2022. We therefore see the current situation on the inflation front as a peak and not as the starting point of a demand shock cycle.
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