Q1 2022 Bond Compass

PriceStats® Analysis: Stability in the Woods

A look at quarterly measures of inflation, based on prices of millions of items sold by online retailers, to help investors anticipate and evaluate the impact of inflation.

Q1 2022

If there was a standout development in 2021, it was the rise in inflation — and how a “transitory” price surge proved to be far more stubborn than expected. The US Federal Reserve (Fed) has certainly taken notice, penciling in three rate hikes for 2022 while dropping the term transitory from its communications. Nonetheless, it expects prices to settle down by the second half of 2022, with an “average” inflation projection of 2.3% in 2023. To say that this is the most important economic forecast in the financial markets is not an overstatement.

PriceStats is showing signs of moderating inflation, with the potential front-loading of prices before the holidays. As the chart below indicates, the monthly gains in December prices were near the year’s lowest, although the elevated gains for 2021 underscore that we are far from being out of the woods. Additionally, the historical pattern of falling monthly prices in the fourth quarter in anticipation of holiday sales was not evident this year. Instead, we had to settle for a slowing of monthly patterns as we wait to see whether the Fed’s view of stabilizing prices in mid-2022 comes to fruition.

PriceStats – US Inflation


Inflation, the global edition

COVID-19 sparked a global pandemic, and the inflation surge that it produced has been a worldwide problem. With the developed world and emerging countries experiencing COVID much differently, it’s no surprise that differences have emerged between developed market (DM) and emerging market (EM)inflation profiles. . As the chart below shows, prices continue to rise faster in most of the emerging countries we track. The PriceStats EM series stood in excess of 15%at year end, versus an overall DM reading of 3.9%. As a result, EM central banks have been at the forefront of this rate hiking cycle, with 10 countries raising their policy rates by more than 25 percentage points over the course of 2021. With currency devaluation contributing to higher food and fuel prices, and the fact that a disproportionate share of EM spending goes to these categories, the emerging world will continue to struggle with high prices to start the new year.

PriceStats — Developed vs. Emerging Market Inflation

Swept up in the inflation wave

Inflation is rising even in historically slow growing countries/regions such as Japan and the eurozone, where PriceStats signals are experiencing yearly gains in excess of 3%. Yet while the Fed has abandoned its transitory tone, leaders at the European Central Bank (ECB) and Bank of Japan believe that prices will likely settle down soon; they remain more concerned about deflation than inflation. For the moment, investors remain sanguine about rate hikes in Europe and Japan, expecting only minimal changes this year. This has created extreme disparities across regional rate expectations, including the widening schism between the UK and the eurozone. As illustrated in the chart below, the inflation gap between the two has narrowed substantially and is well below 10-year averages, driven mainly by rapidly rising inflation in the eurozone. However, we have not seen equal movement in rate expectations, which have been growing for the Bank of England but remain relatively subdued for the ECB. Therefore, the spread between the two-year rate expectations is at historic levels, despite very similar current inflation dynamics. These extreme relationships hint that some form of reversion is forthcoming, most likely via either slowing eurozone prices or rate spreads to compensate for above-average prices.

A Widening Gap — Inflation vs. Rate Expectations

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