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SQM Research Newsletter and Ratings Update - December 2021

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The Inflation Dragon

by Rob da Silva, Head of Research 

For a while now, inflation has been a topic creeping up the market’s “list of things to worry about”. A variety of issues came to attention that were initially dismissed as “niche”, not material or temporary in nature. They were generally bundled under the heading “transitory” and dismissed, including by the Fed.
 
These issues included
  • Over-stimulus: generous pandemic-related support payments feeding a burst of consumer demand
  • The “Great Resignation” – the return to work has not been strong enough, causing labour shortages and wage pressures in many sectors
  • Shortages in trucking and shipping leading to sky-rocketing transport costs
  • Supply-chain issues (e.g. semi-conductors) causing product shortages right at the time when demand is ramping up.
 
…and the list goes on. Over the last few weeks, these inflation developments are now triggering a “DEFCON 1” reaction as the market, and more importantly, the Fed, have moved away from the benign neglect of a “transitory” label to something closer to “be afraid, be very afraid”. Yes, that’s extreme, and we’re not there yet, but that is the direction.
 
The Fed’s most recent rhetoric is much more hawkish, and their recent “dot-point” chart was not comforting. Policy tightening is definitely on the agenda.
 Inflation has caught up with the extended period of under-shooting the long-term average and is now worryingly above it.
So, it seems more and more likely that the inflation dragon needs active taming – it's possibly not going to go to sleep by itself. And timing is important – if inflation embeds itself in the consumer’s mind and infects wage-setting and price-setting expectations, then the price spiral becomes drastically more difficult to contain.
 
It seems we are at a point where it would be wise to actively think about inflation in your investing and portfolio construction considerations.
 
What follows is a broad series of charts that aim to give an overall perspective on the trends in various aspects of inflation.
It seems we are at a point where it would be wise to actively think about inflation in your investing and portfolio construction considerations.
 
What follows is a broad series of charts that aim to give an overall perspective on the trends in various aspects of inflation.
US Inflation Statistics
The U.S. is now high on the list of global inflation rates:
Global Inflation Rates (% p.a.)
Transport Costs
Global container freight index (in U.S. dollars)      
Supply Chain
House Price Inflation
Tight Labour Market?
Central Bank Policy Changes - More Hikes to Come?
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