The second half of 2021 could see a sharp rise in inflation. This is shown by data from global purchasing managers’ indices. While the situation currently appears to be giving no cause for concern for central banks, prices in supply chains are already running high. An inflation rate of two to three percent isn’t giving any central banker sleepless nights. The pressure to keep interest rates low is so great for most central bankers that both the Fed and the ECB will tolerate elevated inflation rates in the short term.
Such rates would not be a cause for concern for investors either, provided the effect were indeed temporary. However, what is emerging from the side effects of the purchasing managers’ indices could lead to much higher inflation rates. And an unexpected inflation shock could force central banks to react, with corresponding repercussions for the markets.
Three factors currently make an inflation shock possible over the course of this year: A pent-up demand, which should resolve as vaccination rates increase and the pandemic subsides, leading to rapidly rising demand. Second, a cash surplus, as both private and corporate spending has been either nonexistent or limited in recent months, while savings rates are also historically high. In the US, the seemingly absurdly high economic stimulus programs designed to stimulate demand are also contributing factors. However, these factors are likely largely factored into the considerations of central bankers and economists.
What is still not sufficiently considered are the price-pushing effects that are already evident in supply chains. Companies that are ramping up production again often encounter almost empty inventories and disrupted supply chains. The IHS Markit report on the EU Purchasing Managers’ Index states: “Delivery times lengthened in February at the second-fastest rate since the survey began almost 24 years ago. Delays and supply problems due to the global increase in demand and ongoing transport problems caused by the coronavirus pandemic caused purchasing prices to rise at their fastest pace in almost a decade.”
These effects can be seen worldwide: The ISM, which compiles the Purchasing Managers’ Index for the USA, quotes respondents, in this case from the chemicals industry: “Supply chains are depleted; inventories up and down the supply chain are empty. Lead times increasing, prices increasing, [and] demand increasing.” In the case of computer chips, the supply bottlenecks have led to production outages in everything from mobile phones to automobiles – with an open outcome. As if all of this weren’t challenging enough, the most important trade route between Asia and Europe is currently blocked. It’s currently impossible to predict when the Suez Canal will be navigable again.
This clearly shows that a difficult-to-calculate but potentially explosive mixture of inflation is rolling toward us from global supply chains. The likelihood that major central banks will have to raise interest rates in the short term in the coming months is rising significantly and should be considered accordingly by investors. Assets that have been running hot in recent months and would react sensitively to a decline in liquidity in the markets would then be particularly vulnerable.
