Inflation out of control?
You might expect to see an inflation chart like this in an emerging market, but this is happening in the 5th largest economy in the world. With war and logistical issues disrupting the supply of energy and many raw materials, German producers are paying more for their inputs than ever before. Producer prices increased 30.8% YoY (blue line) in March with gas prices up an astonishing 145%.
This puts producers in a difficult position: should they push cost increases on to consumers, likely putting pressure on demand for their goods (as well as further increasing CPI), or suffer a major squeeze on profitability? And central banks are under pressure to take action to control inflation. In this environment, the widely publicized 1.7 percentage point downgrade to 2022 GDP that the IMF published last week is not too surprising. It’s difficult to predict where prices will head next, but the economic and financial market impacts are already being felt.
Inflation is always and everywhere a monetary phenomenon. Although we at Kieger are by no means committed monetarists, this chart lends more credence to the idea that inflation will be moving lower in the next months.
The huge withdrawal of central bank liquidity happening currently is truly “unprecedented” (an otherwise-overused term currently). Despite all of the detailed analysis on the effects of quantitative tightening no one can predict the full impact this will have, but it is certainly not Fed Chair Yellen’s 2017 expectation of “watching paint dry”.