Global Weekly Commentary: Inflation at heart of our Outlook Forum
Inflation top of mind
We see price pressures to persist in 2022, mostly driven by the unusual restart dynamics. Eventually, we see a higher inflation regime than pre-Covid.
U.S. consumer price index (CPI) jumped more than expected in October, bringing annual inflation rate to 6.2%, the highest level in three decades.
Data from China this week is expected to show a further slowdown in economic activity. UK CPI will also be in focus.
Inflation was at the heart of debates among BlackRock portfolio managers at our 2022 Outlook Forum last week. Inflation is being driven by the unusual supply shocks tied to the restart. We expect these imbalances to resolve over the next year, but see inflation as persistent and settling at a higher level than pre-Covid. We prefer equities in such an environment, as we expect a more muted yield response to inflation than in the past. This should keep real yields low, supporting stocks.
Unusual restart, unusual inflation
U.S. core CPI breakdown, 2003-2021
Sources: BlackRock Investment Institute and U.S. Bureau of Labor Statistics, with data from Haver Analytics, November 2021. Notes: The chart shows the annual rate of the core goods and core services consumer price index (CPI).
The U.S. CPI rose more than expected in October. This caught markets off guard, but as we have argued previously we shouldn’t be surprised by surprising data given the unique nature of the economic restart. It shows how little is known about restart dynamics. Although price rises are broad based, the mix of inflation shows the unusual restart dynamics at play. The run-up of inflation has been due to supply bottlenecks coupled with unusually strong household spending on goods rather than services. The shares of goods spending in the total personal consumption expenditures jumped to around 36%, the highest level in 15 years. Prices of goods excluding food and energy – which had been in deflation for most of the past decade – have surged way beyond core services prices, reflecting the restart disruptions and shifts in spending patterns. See the chart above. Participants at our 2022 Outlook Forum generally agreed: 1) that higher inflation will persist next year while spending on goods remains high and supply bottlenecks continue, and; 2) this supply-demand mismatch should resolve as the restart plays through, supply comes back on stream fully and spending on goods switches back to services. As a result we are still broadly pro-risk headed into 2022.
Our new nominal theme has guided us all year. Central banks, especially those with new policy frameworks such as the Federal Reserve and European Central bank, are more tolerant of higher inflation. The Fed may have achieved its new inflation mandate to make up for past misses, but will likely still keep rates low to achieve its more ambitious full employment mandate. We have moved forward our expectation for the Fed to start raising rates next year – if not as soon as the market pricing. But what matters is the overall policy rate trajectory, not just the liftoff timing. We expect the most muted response of policy – and nominal government bond yields – to higher inflation in decades, underpinning the new nominal.
The policy reaction is not uniform. Other developed market central banks, such as the Bank of England, have signalled a policy rate path with steeper initial increases. That has created volatility in short-term interest rate markets over the past month. Thinning liquidity and crowded positions in bond markets have led to exaggerated moves and confusing yield signals. Yet even these central banks seem to be looking only to remove the pandemic-era stimulus and get back to the pre-Covid stance that they consider “neutral,” instead of seeking to lean against current inflation. In the market’s view, there are risks in this approach – moving too sharply could prove to be a mistake. A policy reversal has been priced in for the UK.
There are risks to our new nominal theme. Central banks could drop their new frameworks– although we see the bar for doing so as very high. And higher inflation could increasingly become a political issue or start to shape expectations of future inflation, putting pressure on central banks to adopt a more aggressive stance. And the journey to reach net-zero emissions by 2050 may be more chaotic than we expect, raising the specter of more inflation later. The widening gap between governments’ ambition to cut emissions and implementation raises the risks of such a disorderly transition.
Bottom line: We see equities as a potential buffer against inflation because we expect a more muted response of yields to inflation than in the past. Real, or inflation-adjusted, yields should remain low or negative as a result, making equities attractive. In addition, many companies so far have been able to pass on higher input costs and keep their margins intact. We are overweight equities and inflation-linked bonds, and underweight nominal government bonds on both tactical and strategic horizons. Trading liquidity in bond markets has declined, resulting in exaggerated moves that add to the confusion of reading yield move signals. Stay tuned for our 2022 Global Outlook next month to hear our updated views.
© 2021 BlackRock, Inc. All rights reserved.
General disclosure: This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of November 15, 2021 and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks.
In the U.S. and Canada, this material is intended for public distribution. In EMEA Until 31 December 2020, issued by BlackRock Investment Management (UK) Limited, authorized and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 2020394, has issued this document for access by Professional Clients only and no other person should rely upon the information contained within it. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorized activities conducted by BlackRock. From 1 January 2021, in the event the United Kingdom and the European Union do not enter into an arrangement which permits United Kingdom firms to offer and provide financial services into the European Union, the issuer of this material is:(i) BlackRock Investment Management (UK) Limited for all outside of the European Union; and(ii) BlackRock (Netherlands) B.V. for in the European Union, BlackRock (Netherlands) B.V. is authorized and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20-549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded. In Switzerland, for qualified investors in Switzerland: This document is marketing material. Until 31 December 2021, this document shall be exclusively made available to, and directed at, qualified investors as defined in the Swiss Collective Investment Schemes Act of 23 June 2006 (“CISA”), as amended. From 1 January 2022, this document shall be exclusively made available to, and directed at, qualified investors as defined in Article 10 (3) of the CISA of 23 June 2006, as amended, at the exclusion of qualified investors with an opting-out pursuant to Art. 5 (1) of the Swiss Federal Act on Financial Services ("FinSA"). For information on art. 8 / 9 Financial Services Act (FinSA) and on your client segmentation under art. 4 FinSA, please see the following website: www.blackrock.com/finsa. For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the “Advice Law”), nor does it carry insurance thereunder. In South Africa, please be advised that BlackRock Investment Management (UK) Limited is an authorized financial services provider with the South African Financial Services Board, FSP No. 43288. In the DIFC this material can be distributed in and from the Dubai International Financial Centre (DIFC) by BlackRock Advisors (UK) Limited — Dubai Branch which is regulated by the Dubai Financial Services Authority (DFSA). This material is only directed at 'Professional Clients’ and no other person should rely upon the information contained within it. Blackrock Advisors (UK) Limited - Dubai Branch is a DIFC Foreign Recognised Company registered with the DIFC Registrar of Companies (DIFC Registered Number 546), with its office at Unit 06/07, Level 1, Al Fattan Currency House, DIFC, PO Box 506661, Dubai, UAE, and is regulated by the DFSA to engage in the regulated activities of ‘Advising on Financial Products’ and ‘Arranging Deals in Investments’ in or from the DIFC, both of which are limited to units in a collective investment fund (DFSA Reference Number F000738). In the Kingdom of Saudi Arabia, issued in the Kingdom of Saudi Arabia (KSA) by BlackRock Saudi Arabia (BSA), authorized and regulated by the Capital Market Authority (CMA), License No. 18-192-30. Registered under the laws of KSA. Registered office: 29th floor, Olaya Towers – Tower B, 3074 Prince Mohammed bin Abdulaziz St., Olaya District, Riyadh 12213 – 8022, KSA, Tel: +966 11 838 3600. The information contained within is intended strictly for Sophisticated Investors as defined in the CMA Implementing Regulations. Neither the CMA or any other authority or regulator located in KSA has approved this information. The information contained within, does not constitute and should not be construed as an offer of, invitation or proposal to make an offer for, recommendation to apply for or an opinion or guidance on a financial product, service and/or strategy. Any distribution, by whatever means, of the information within and related material to persons other than those referred to above is strictly prohibited. In the United Arab Emirates this material is only intended for -natural Qualified Investor as defined by the Securities and Commodities Authority (SCA) Chairman Decision No. 3/R.M. of 2017 concerning Promoting and Introducing Regulations. Neither the DFSA or any other authority or regulator located in the GCC or MENA region has approved this information. In the State of Kuwait, those who meet the description of a Professional Client as defined under the Kuwait Capital Markets Law and its Executive Bylaws. In the Sultanate of Oman, to sophisticated institutions who have experience in investing in local and international securities, are financially solvent and have knowledge of the risks associated with investing in securities. In Qatar, for distribution with pre-selected institutional investors or high net worth investors. In the Kingdom of Bahrain, to Central Bank of Bahrain (CBB) Category 1 or Category 2 licensed investment firms, CBB licensed banks or those who would meet the description of an Expert Investor or Accredited Investors as defined in the CBB Rulebook. The information contained in this document, does not constitute and should not be construed as an offer of, invitation, inducement or proposal to make an offer for, recommendation to apply for or an opinion or guidance on a financial product, service and/or strategy. In Singapore, this is issued by BlackRock (Singapore) Limited (Co. registration no. 200010143N). This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. In Hong Kong, this material is issued by BlackRock Asset Management North Asia Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong. In South Korea, this material is for distribution to the Qualified Professional Investors (as defined in the Financial Investment Services and Capital Market Act and its sub-regulations). In Taiwan, independently operated by BlackRock Investment Management (Taiwan) Limited. Address: 28F., No. 100, Songren Rd., Xinyi Dist., Taipei City 110, Taiwan. Tel: (02)23261600. In Japan, this is issued by BlackRock Japan. Co., Ltd. (Financial Instruments Business Operator: The Kanto Regional Financial Bureau. License No375, Association Memberships: Japan Investment Advisers Association, the Investment Trusts Association, Japan, Japan Securities Dealers Association, Type II Financial Instruments Firms Association.) For Professional Investors only (Professional Investor is defined in Financial Instruments and Exchange Act). In Australia, issued by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975 AFSL 230 523 (BIMAL). The material provides general information only and does not take into account your individual objectives, financial situation, needs or circumstances. In China, this material may not be distributed to individuals resident in the People’s Republic of China (“PRC”, for such purposes, excluding Hong Kong, Macau and Taiwan) or entities registered in the PRC unless such parties have received all the required PRC government approvals to participate in any investment or receive any investment advisory or investment management services. For Other APAC Countries, this material is issued for Institutional Investors only (or professional/sophisticated /qualified investors, as such term may apply in local jurisdictions). In Latin America, for institutional investors and financial intermediaries only (not for public distribution). No securities regulator within Latin America has confirmed the accuracy of any information contained herein. The provision of investment management and investment advisory services is a regulated activity in Mexico thus is subject to strict rules. For more information on the Investment Advisory Services offered by BlackRock Mexico please refer to the Investment Services Guide available at www.blackrock.com/mx
Not FDIC Insured | May Lose Value | No Bank Guarantee
© 2021 BlackRock, Inc. All Rights Reserved. BLACKROCK, iSHARES and ALADDIN are trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.