As we know, the world enjoyed an unprecedented K-shaped recovery last year as goods boomed via stimulus and work from home. But high tough services completely busted amid social distancing.
Now, it is becoming plain that inflation trends are following exactly the same pattern. Via some great charts from The Daily Shot on the US economy. Demand is bifurcated:
And so, therefore, is inflation:
With property (rents) leading services down:
As work from home turns rural rush leaving cities awash with property supply:
The same trends are apparent in Australia.
This brings to mind two big ideas for me. First, in nations with personal responsibility for the virus, like the US, as vaccines take effect and services boom back, we may well see some core inflation lift in the short term beyond simple base effects. Nanny state virus management regimes will not as services take longer to recover.
Second, central banks will look through this because they will see that demand will shift away from goods and towards services, especially where fiscal supports are also wound in.
So, I still do not expect a sustained inflation pulse into 2022. Especially so, given I expect China to slow and CNY to roll, resulting in a “pop” for commodity prices. Plus, short supply bottlenecks in freight, semis etc will resolve.
But, if this hand-off of growth from the Chinese supply side to the US demand side takes longer than I expect and the two run side-by-side, then real rates may back-up to levels that upset markets.