singaporeen
Inflation may be more about the destination than the peak

Inflation may be more about the destination than the peak

22-06-2022 | Insight

We’re facing a highly unusual inflationary situation. Inflation uncertainty, and especially uncertainty about where inflation will settle, is likely to remain elevated in the coming quarters.

  • Martin van Vliet
    Martin
    van Vliet
    Strategist Global Macro Team
  • Bob Stoutjesdijk
    Bob
    Stoutjesdijk
    Strategist and Portfolio Manager Global Macro Fixed Income
  • Rikkert  Scholten
    Rikkert
    Scholten
    Strategist

Speed read

  • Easing of supply chain bottlenecks has temporarily stalled
  • Wage price spiral risk smaller in Euro area, but pressure is building
  • Energy transition: from ‘climateflation’ and ‘greenflation’ to ‘fossilflation’

Inflation has been hotly debated since the pandemic started. The confluence of supply shocks, extraordinarily stimulatory fiscal and monetary policies and powerful geopolitical developments has led to highly unusual inflation outcomes by historical standards. To get a better understanding of the cyclical and secular trends driving inflation we recently organized the second edition of the Robeco Annual Inflation Day.

The discussion was focused on four topics:

  1. Supply chain disruptions
  2. The interplay between wages and inflation
  3. Globalization and deglobalization
  4. Inflationary effects from the energy transition

We invited external specialists to take us through these topics in more detail.1 This note summarizes our key takeaways. The overall conclusion is that while headline inflation in the US might have peaked, it might not yet have done so in the Eurozone and the UK. Moreover, the descent from the peak may be slow and could initially look more like plateauing, thus keeping central banks concerned about a persistent feedthrough into higher inflation expectations and wages. This also implies that inflation uncertainty, especially about where inflation will settle, is likely to remain elevated in the coming quarters.

Those interested in our views on how to navigate fixed income markets amid elevated inflation and the associated uncertainty are invited to read our latest Central Bank Watcher or listen to our recent podcast on the topic. In mid-June we will also publish our new Global Macro Quarterly Outlook, in which we will outline how inflation and central bank policies impact our portfolio decisions on duration, FX and fixed income asset allocation. So stay tuned!

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
Subscribe

Supply chain disruptions and inflation

Disruptions to global supply chains due to the pandemic have been a source of upward pressure on inflation, especially goods inflation, over the past two years. We note from the discussion that supply chain disruptions peaked in October 2021 but that the easing of bottlenecks has stalled since March 2022. The key reasons for this are a decline in Chinese semiconductor production (-12% month-on-month in March) due to Covid restrictions, and European car production suffering from a shortage of wire harnesses due to the war in Ukraine. It is likely that the war and the sanctions on Russia, by restraining the supply of essential inputs such as fertilizers and grain, will amplify the surge in global food price inflation.

One area where progress has continued is port congestion. Long queues of ships were building at ports such as Los Angeles and Long Beach between June and October 2021. These queues are now almost back to normal. Practical steps such as creating space by removing (empty) containers from the harbor, financial incentives to work on weekends, and determining the place in the queue when ships leave their port of origin have been helpful in reducing the congestion. Another positive point worth mentioning is the limited impact so far of Covid restrictions on the shipment of Chinese exports. While the number of outbound ships from the port of Shanghai is down, other Chinese ports have been able to take over. But there remains a high degree of imbalance in demand for Asian goods compared to Asian and Chinese demand for goods produced outside of Asia. This imbalance accounts for the ongoing scarcity in containers for shipments out of Asia, and helps explain still-elevated container freight rates.

Car prices have been an important source of inflation, as evident from the rise in the prices of new and used vehicles, and in the cost of car rental and insurance. It is therefore encouraging that auto production plans in the US have recently expanded again, reaching pre-pandemic levels and diverging from the ongoing interruptions that are haunting European producers.

Shortages of semiconductors have been a major bottleneck in the production of many goods. These shortages continue, but semiconductor production has accelerated and is now 19% above the level that would have been expected based on pre-pandemic trend growth. As investments in the chip sector continue – we’ve seen a 55% increase in capex since the pandemic – it’s possible that there could be an over-supply of computer chips by 2023.

The interplay between wages and inflation

Wage growth in the US (approximately 4.7%) is exceeding that in the Eurozone (circa 2%). Part of this difference can be explained by the policy response to the closure of businesses at the start of the pandemic. US policy focused on income support, while European plans were aimed at job preservation. In the US, 22 million workers were fired and later re-hired, while in Europe relatively few people lost their jobs, thanks to furlough schemes. As it is easier to obtain a wage increase when entering a new job rather than in an existing job, the process of re-hiring amid growing labor shortages resulted in high wage rises in the US. In that sense the labor market churn rate at least partially explains wage-growth differentials around the world. Note that in the US – and in the UK, in part due to Brexit – the supply of labor has also been dampened, which relates to early retirement and lingering pandemic effects (preference for part-time employment, for example).

It is difficult at this stage to judge how significant the risk of a wage-price spiral is, but we take the view that such risk appears more substantial in the US than in the Eurozone. The Eurozone has a long history of relatively subdued wage growth and inflation, which could help limit the pace at which wage demands rise from here onwards. Looking at incoming pay settlements, Eurozone wage growth is likely to stay within the range of the past 20 years. The situation is somewhat different in the US and UK, where inflation and wage growth has been more volatile over the past decade. That said, elevated headline inflation in the Eurozone has started to feed into higher inflation expectations, including that of consumers. The risk of higher inflation expectations feeding through into persistently higher wage growth should therefore not be disregarded. It seems hawkish ECB governors are increasingly aware of this.

Globalization, deglobalization and inflation

Globalization of value chains and the integration of China into the world economy have acted as a restraining force on goods price inflation over the past few decades. A scenario of ‘slowbalization’, or slower globalization, and more hypothetically deglobalization could be a reason to expect somewhat higher future inflation. It’s true that the pandemic revealed many weaknesses and important dependencies in the global supply chain for a range of goods, and ever since 2020, many pundits have been expecting a sharp trend toward the onshoring of production. However, thus far there seems to be little sign of a broad process of deglobalization. For example, while the Chinese market share in the consumption of US manufactured goods has been declining since 2018, other low or lower-wage countries (e.g. Vietnam) have taken over China’s share. Indeed, global trade volumes remain high.

It is also important to note that the dampening effect of globalization on inflation had already been waning. From 1998 to 2008 this impact was estimated to be -0.5pp p.a., versus -0.25pp for the period 2009 to 2019. Finally, there is little data supporting the idea of re-shoring (bringing back production) as a solution to deal with supply chain disruptions. Other strategies, such as increasing inventories and diversifying supply chains, appear to be more popular.

Energy transition and inflation

When thinking about the overall inflationary effects from the energy transition to reach net-zero GHG emissions, ECB Executive Board member Schnabel argues that it is helpful to distinguish between three shocks. These are ‘climateflation’, i.e. cost increases due to climate change itself (such as food price increases caused by severe weather events); ‘greenflation’, i.e. inflation due to, for example, increases in the price of commodities used in green technologies, and ‘fossilflation’, which is the legacy cost of the dependency on fossil energy sources.

On the last-mentioned shock, it was discussed that the ramp-up of capex in green energy has been too slow in comparison with the disinvestments from fossil energy over the past five years. A further delay in green capex – the EU is now discussing a EUR 200 billion renewable energy investment package for the period 2022-2030 – is thus one of the channels via which the energy transition could contribute to higher future inflation.

Carbon taxes could be a relatively efficient way to stimulate the transition in demand away from fossil fuels and towards green energy. Our discussion highlighted that effective carbon taxation would add approximately 0.25% p.a. to US inflation and 0.1% to German inflation for a period of at least three years. Emission caps and a prescribed minimum percentage of renewable energy sources would be less effective in bringing about such a transition – and would be more inflationary. Other channels through which the energy transition could be inflationary include a potential wage-price spiral resulting from scarcity of qualified staff to execute the transition process.

1 We would like to thank Arend Kapteyn (UBS), Greg Fusezi (JP Morgan), Yulia Zhestkova and Daan Struyven (Goldman Sachs) for sharing their views at the Inflation Day.

Important information

This information is for informational purposes only and should not be construed as an offer to sell or an invitation to buy any securities or products, nor as investment advice or recommendation.
The contents of this document have not been reviewed by the Monetary Authority of Singapore (“MAS”). Robeco Singapore Private Limited holds a capital markets services license for fund management issued by the MAS and is subject to certain clientele restrictions under such license.
An investment will involve a high degree of risk, and you should consider carefully whether an investment is suitable for you.

Logo

Important Information

Warning/Important note: This website contains information which is only available to qualified investors as defined below. If you are not a qualified investor, please click “I Disagree” to leave the website.

By clicking on "I agree", I declare that: 

  • I am a qualified investor as defined under 1
  • I have read and understood the Terms and Conditions and Disclaimers as described under 2

1 - This website may only be accessed directly or indirectly by the following persons in Singapore:

1) “institutional investor” under section 304 of the Securities and Futures Act (Cap.289)(“SFA”), which means:
(i) the Government; (ii) a statutory board as may be prescribed by regulations made under section 341 of the SFA; (iii) an entity that is wholly and beneficially owned, whether directly or indirectly, by a central government of a country and whose principal activity is (A) to manage its own funds; (B) to manage the funds of the central government of that country (which may include the reserves of that central government and any pension or provident fund of that country); or (C) to manage the funds (which may include the reserves of that central government and any pension or provident fund of that country) of another entity that is wholly and beneficially owned, whether directly or indirectly, by the central government of that country; (iv) any entity (A) that is wholly and beneficially owned, whether directly or indirectly, by the central government of a country; and (B) whose funds are managed by an entity mentioned in sub-paragraph (iii); (v) a central bank in a jurisdiction other than Singapore; (vi) a central government in a country other than Singapore; (vii) an agency (of a central government in a country other than Singapore) that is incorporated or established in a country other than Singapore; (viii) a multilateral agency, international organisation or supranational agency as may be prescribed by regulations made under section 341 of the SFA; (ix) a bank that is licensed under the Banking Act (Cap.19); (x) a merchant bank that is approved as a financial institution under section 28 of the Monetary Authority of Singapore Act (Cap.186); (xi) a finance company that is licensed under the Finance Companies Act (Cap.108); (xii) a company or co-operative society that is licensed under the Insurance Act (Cap.142) to carry on insurance business in Singapore; (xiii) a company licensed under the Trust Companies Act (Cap.336); (xiv) a holder of a capital markets services licence; (xv) an approved exchange; (xvi) a recognised market operator; (xvii) an approved clearing house; (xviii) a recognised clearing house; (xix) a licensed trade repository; (xx) a licensed foreign trade repository; (xxi) an approved holding company; (xxii) a Depository as defined in section 81SF of the SFA; (xxiii) an entity or a trust formed or incorporated in a jurisdiction other than Singapore, which is regulated for the carrying on of any financial activity in that jurisdiction by a public authority of that jurisdiction that exercises a function that corresponds to a regulatory function of the Authority under this Act, the Banking Act (Cap.19), the Finance Companies Act (Cap.108), the Monetary Authority of Singapore Act (Cap.186), the Insurance Act (Cap.142), the Trust Companies Act (Cap.336) or such other Act as may be prescribed by regulations made under section 341 of the SFA; (xxiv) a pension fund, or collective investment scheme, whether constituted in Singapore or elsewhere; (xxv) a person (other than an individual) who carries on the business of dealing in bonds with accredited investors or expert investors; (xxvi) the trustee of such trust as the Authority may prescribe, when acting in that capacity; or; (xxvii) such other person as the Authority may prescribe.

2) “relevant person” under section 305(1) of the SFA, which means:
(i) An accredited investor; (ii) a corporation the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; (iii) a trustee of a trust the sole purpose of which is to hold investments and each beneficiary of which is an individual who is an accredited investor; (iv) an officer or equivalent person of the person making the offer (such person being an entity) or a spouse, parent, brother, sister, son or daughter of that officer or equivalent person; or (v) a spouse, parent, brother, sister, son or daughter of the person making the offer (such person being an individual).

3) any person who acquires the units [in a collective investment scheme] as principal if the offer is on terms that the units may only be required at a consideration of not less than $200,000 (or its equivalent in a foreign currency) for each transaction, whether such amount is to be paid for in cash or by exchange of units in a collective investment scheme, securities, securities-based derivatives contracts or other assets, and if the following condition is satisfied: (i) the offer is not accompanied by an advertisement making an offer or calling attention to the offer or intended offer; (ii) no selling or promotional expenses are paid or incurred in connection with the offer other than those incurred for administrative or professional services, or by way of commission or fee for services rendered by any of the persons specified in section 302B(1)(d)(i) to (vi) of the SFA; and (iii) no prospectus in respect of the offer has been registered by the Authority or, where a prospectus has been registered (A) the prospectus has eAccxpired pursuant to section 299 of the SFA; or (B) the person making the offer has before making the offer 1. informed the Authority by notice in writing of its intent to make the offer in reliance on the exemption under this subsection; and 2. taken reasonable steps to inform in writing the person to whom the offer is made that the offer is made in reliance on the exemption under this subsection.

4) Or otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

If you are not any of the types of persons described above, you are not authorized to enter this website and you should leave this website immediately.

2 Terms and Conditions
You acknowledge that you have read these Terms and Conditions (“Terms”) prior to accessing the website located at www.robeco.com/sg (“Website”) and you agree to be bound by the Terms.  If you do not agree to all of the Terms, you are not an authorised user and you should not use the Website. The Website is owned by Robeco Singapore Private Limited (company registration number: UEN. 201541306Z), which is licensed by the Monetary Authority of Singapore (“MAS”) pursuant to the Securities and Futures Act (Cap.289) (“SFA”) of Singapore, and is managed by Robeco Singapore Private Limited and/or its affiliates (collectively, as “Robeco”). The Website is intended for and should be accessed by institutional investors or accredited investors (as defined under Section 4A of the SFA) of Singapore.  The Website is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject the Robeco to any registration or licensing requirement within such jurisdiction.  It is your responsibility to observe all applicable laws, rules and regulations of any relevant jurisdiction. The content contained in the Website is owned by Robeco and/or its information providers and is protected by applicable copyrights, trademarks, service marks, and/or other intellectual property rights.  You may not copy, distribute, modify, post, frame or link the Website, including any text, graphics, video, audio, software code, user interface, design or logos.  You may not distribute, modify, transmit, reuse, repost, or use the content of the Website for public or commercial use, including all text, images, audio and/or video.  Robeco may terminate your access to the Website for any reason, without prior notice. Neither Robeco, nor any of its associates, nor any director, officer or employee accepts any liability whatsoever for any loss arising directly or indirectly from the access of the Website.  You agree to indemnity and hold Robeco, its associates, directors, officers or employees harmless against any and all claims, losses, liability, costs and expenses arising from your use of the Website due to violation of the Terms. Robeco reserves the right to change, modify, add or remove any parts of the Terms at any time and for any reason.  The Terms shall deemed to be effective immediately upon posting. The Terms shall be governed by, and shall be construed in accordance with, the law of Singapore.

Disclaimers
The Website has not been reviewed by the MAS. Accordingly, the Website may not be accessed directly or indirectly to persons in Singapore other than (i) to an institutional investor under Section 304 of the SFA, (ii) to a relevant person pursuant to Section 305(1), or any person pursuant to Section 305(2), and in accordance with the conditions specified in Section 305, of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. 

Nothing in the Website constitutes tax, accounting, regulatory, legal or investment advice.  The Website is for informational purposes only and should not be construed as an offer to sell or an invitation to buy any securities or products, nor as investment advice or recommendation or for the purpose of soliciting any action in relation to Robeco’s businesses, or solicitation by anyone in any jurisdiction in which such an offer or solicitation is not authorised or to any person to whom it is unlawful to make such an offer and solicitation. Any reproduction or distribution of information from the Website, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited.  By accessing to the Website, you agree to the foregoing.  

The funds referred to in the Website are for information only.  It is not a recommendation or investment advice, nor does it mean the funds is suitable for all investors.  The contents of the website is not reviewed by the MAS.  Any decision to participate in the funds should be made only after reviewing the sections regarding investment considerations, conflicts of interest, risk factors and the relevant Singapore selling restrictions.  You should consult your professional adviser if you are in doubt about the stringent restrictions applicable to the use of the Website, regulatory status of the funds, applicable regulatory protection, associated risks and suitability of the funds to your objectives.

Any decisions made based on the information contained in the Website are the sole responsibility of yours.  Any investments made or to be made shall be with your independent analyses based on your financial situation and objectives.  The investments and strategies contained in the Website may not be suitable for all investors and are not guaranteed by Robeco.  

Investment involves risks and may lose value.  Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future.  The value of your investments may fluctuate.  Past performance is no indication of current or future performance.  The Website may contain projections or other forward looking statements regarding future events or future financial performance of countries, markets or companies and such projection or forecast is not indicative of the future.  The information contained in the Website, including any data, projections and underlying assumptions are based upon certain assumptions, management forecasts and analysis of information available on an “as is” basis and without warranties of any kind, whether express or implied, and reflects prevailing conditions and Robeco’s views as of the date published or indicated, and maybe superseded by subsequent events or for other reasons.  The information contained in the Website are accordingly subject to change at any time without notice and Robeco are under no obligation to notify you of any of these changes.  Robeco expressly disclaims all liability for errors and omissions in the information presented in the Website and for the use or interpretation by others of information contained in the Website.

Robeco Singapore Private Limited holds a capital markets services licence for fund management issued by the MAS and is subject to certain clientele restrictions under such licence.  An investment will involve a high degree of risk, and you should consider carefully whether an investment is suitable for you.

I Disagree