Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Why energy and labour inflation are more important than supply chain issues
Søren Otto Simonsen
Senior Investment Editor
Summary: Inflation is surging, especially in the Western world. Central bankers have for a while now discussed whether the price increases are here to stay. Our answer is a rock solid ambiguous yes.
If you look up inflation in financial study books, you will see that there are two kinds of inflation – temporary and structural. As the word suggests, the former refers to price increases that are caused by some external global financial event, which also has a known or unknown end-date. The latter is more fundamental and is the inflation on which society is built.
“Generally, it is our belief that the inflation we see is stickier than some central banks – especially the Fed – believe. With that, I mean that we cannot only attribute it to temporary impulses and thus, we should expect it to be higher for longer, which can cause all sorts of turmoil on the financial markets,” says Peter Garnry, Head of Equity Strategy.
To learn more about inflation, take a look at the SaxoSession, with our Chief Investment Officer, Steen Jakobsen, where he takes you through the ins and out of the very important concept.
Humans and energy keep prices high
When speaking about stickiness of inflation, it is necessary to consider which drivers of higher prices have the sturdiness to hang around. A primary component of the current increase is the global labour shortage.
“We are seeing inflation on the higher side of what we have had historically and one reason for that is labour shortages, which cause a more permanent high level of inflation, as they are pushing up wages in the USA, UK and in Europe to a degree we haven't seen for many decades, especially for lower income jobs like trucking and services,” Garnry says.
He adds that the rent and housing markets are also key in terms of pushing inflation higher, structurally: “We are also monitoring rent prices very closely, because as a whole other part of the pandemic story, we’ve seen them galloping because of very low interest rates.”
Another area of the financial industry, which can add to structural inflation, is the commodities market: “I think another area where we're also seeing price increase is in the most basic input of all - commodities. In 2021, we saw higher prices across all sectors. Energy, metals, agriculture. Agriculture is the worrying part because its prices were more than 30% above the annual average, and we’ve got weather phenomena making it realistic that we could see these high agricultural prices continue into 2022.
The whole energy sector in Europe and Asia, is being hit by surging gas prices. Simultaneously, oil prices are at the highest they've been for a number of years. Normally the cure for high prices is high prices because it incentivizes production and lowers demand, but the green transformation paves the way for increasing energy prices continuing. That means that the demand side is lacking in that balancing activity,” says Ole Hansen, Head of Commodity Strategy.
According to Hansen, we shouldn’t expect prices to fall any time soon: “It basically means we could see energy prices elevated for the foreseeable future and since oil and gas are such integral parts in almost everything, it will be part of the structural price increases in society - just take a look at fertilizer. Who would have thought we could run out of fertilizer?” says Ole Hansen, Head of Commodity Strategy.
The inflationary container will be emptied at some point
So while there’s an argument to be made that inflation is here to stay, we may see some pressure being relieved in due time, as Garnry argues that increased prices of shipping should come down, if history provides any guidance: “The supply effects on inflation from increasing container freight prices are temporary - we will see container prices come down. The container and logistics industries have historically been industries with boom bust cycles, so when you have these high prices, more capacity is being built, ships are put in the sea, so I think those effects will move away. We will get there, it will just take some time,” he says.
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