Higher inflation for longer


Global Market Review

Intensifying inflationary pressures

The International Monetary Fund (IMF) warned that the world is facing inflationary pressures that will be “higher and longer than expected”. During October, US Federal Reserve Chair Jerome Powell commented: “We now see higher inflation and the bottlenecks lasting well into next year … I do think it’s time to taper (but) I don’t think it’s time to raise rates because … it would be premature to do so at a time when we are far below the level of jobs that we had in 2020”. The yield on the ten-year US Treasury bond rose over October, climbing as high as 1.68% during the month.

“I do think it’s time to taper (but) I don’t think it’s time to raise rates”  (Fed Chair Jerome Powell)

Disappointing US economic data

Having expanded at an annualised rate of 6.7% during the second quarter of 2021, the US economy achieved growth of only 2% in the third quarter, hampered by inflationary pressures, supply chain problems, and the impact of the Delta variant of the Covid-19 virus. Elsewhere, the economy added a lacklustre 194,000 jobs during September, compared with a monthly year-to-date average of 561,000. Although the rate of unemployment fell from 5.2% to 4.8%, it remained significantly above its pre-pandemic level of 3.5% in February 2020. Nevertheless, the Dow Jones Industrial Average Index rose by 5.8% during October.

China shows signs of flagging

China’s economy expanded by only 4.9% year on year during the third quarter, following second-quarter growth of 7.9% and first-quarter growth of 18.3%. Meanwhile, the country’s rate of producer price inflation rose at an annualised rate of 10.7%, driven up by surging raw material costs and energy shortages. The Shanghai Composite Index fell by 0.6% over the month.

“Inflation, inflation, inflation”

Inflationary pressures continued to dominate discussions at the European Central Bank (ECB), where President Christine Lagarde observed: “We talked about inflation, inflation, inflation”. Looking ahead, ECB policymakers expect inflationary pressures to continue in the short term before declining in 2022. The eurozone’s inflation rate soared to its highest level since July 2008, rising from 3.4% to 4.1% during October.

“Sand in the wheels”

Business sentiment in Germany fell for a fourth straight month during October, according to the Ifo Institute, which warned: “Scepticism is increasingly evident in expectations … sand in the wheels of the German economy is hampering recovery”. The Dax Index rose by 2.8% over the month.