Will K-shaped inflation crash markets?

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.

David Llewellyn-Smith
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Comments

    • It is well known among Chinese – only lazy or stupid kids are sent to Australia.
      US then UK are top choices. Australia doesn’t attract the best anymore, even from India.

    • Great news, hope they really drive that point home to their students and they stop coming in the excessively large numbers they have been in recent times as when a class is 80% or so foreign it’s hardly as Aussie education, every class should have a limit of 20% or less foreign students.

      • Of course this has nothing to do with the falling number of students in China which given recent fall of 15% in births looks to be ongoing or that it will play well into CCP narrative of everyone being against China’s rise (no we are against their aggressive claims in SCS, breaking human rights norms to which they are signatories, government led industrial espionage etc)

        • 15% fall in birth rates? That’s interesting.

          China dropped the one child policy in 2015, I would have thought it would have gone up not down.

          Any idea what’s caused it? because 15% is heck of a drop in a country of a billion+ people.

          • It might not be 15% in one year but overseas observers have thought for many years, like since the one child policy was dropped, that the official birth figure was exaggerated. Of course what a surprise. Maybe the govt is slowly dropping the figure to reality. The reason is women working and cost, as usual, I believe. And no doubt the 100, million extra men – hard to marry.