Has inflation continued to go up?

The CPI in the United States increased by 7% in December 2021 as compared to the same period in 2020.

Consumer expectations have increased, but only moderately, and these just tend to follow the actual trend of inflation. Economists have increased their forecasts, but again, it is only slightly and, in the US, for instance, by no more than the Fed. In short, firms stand out like a sore thumb for suggesting that price pressure is exploding while the rest have seen little to fear.

Mr.Steve Barrow, Head of Standard Bank G10 Strategy, said: "We know who we would trust on this one. It is not the policymakers or economists, struggling with their forecasts in light of new sources of price pressure (supply chains). Nor is it consumers whose expectations are very backward looking. We would not trust financial markets either, as investors have had a voracious appetite for any assets, given central bank monetary largesse, and can’t seem to distinguish inflation risks as a result".

"The firms setting the prices are the key, and they have been saying all along that inflation is going to be much higher than anyone else. They might not readily express this as an annual percentage figure for inflation across the economy, but once you sum up their views to get an aggregate picture, it is pretty clear what is happening. They have been signalling much higher inflation, and, as we’ve seen, prices have surged. The base effects of this big rise may well mean that annual inflation rates will start to come down. But does that mean that price pressure is easing? We are not so sure. For a start, surveys of firms do not suggest any let-up in price pressures. For instance, the National Association of Business Economists (NABE) said in a recent survey that some 53% of their companies increased prices in Q4, which is the highest in the survey’s 40-year history. But what’s significant is that more than 50% still see further price rises over the next three months. Firms in other countries are the same", Mr.Steve Barrow said.

Another point is that many prices have increased significantly during COVID-19 but in many cases, consumers were not seeing their expenditures surge as a result because they were constrained from going to the shops or driving to see friends and relatives. People will continue to return to pre-COVID activities as economies reopen, but they will find that the prices of many of those goods and activities have risen significantly.

In other words, even if measured annual inflation comes down, consumers will feel that the inflation they face has gone up, and probably quite considerably. This will be felt in those areas where prices may only adjust annually, like rents, for instance, or the much-feared gas price increases to come in the UK and elsewhere. As these price increases are felt, the demand for higher wages will increase, threatening a wage-price spiral even if measured inflation is coming down. Hence, the bottom line from all this is that we should not think that any declines in annual rates of inflation in coming months represent a vindication of those that believe inflation to be transitory, while, for the markets, it seems likely that bond yields will rise even as (or if) measured annual inflation comes down.