PriceStats® Analysis: From Bad to Worse

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.

The first hundred days of 2022 have not brought good news for those hoping that the inflation trend would be different this year. This is partly, but not entirely, due to the ramifications of the Russia-Ukraine war and its knock-on effects on commodity markets, especially oil.

PriceStats daily inflation measures show a clear inflection point in the trend of the US price level in early March as retaliatory sanctions began to be imposed on Russia and higher oil prices were quickly passed through to consumer fuel prices. This rapid acceleration in prices was relatively short-lived, lasting just over a two-week period. But the inflation damage has been done.

Price gains are once again settling back to their pre-war trend, but this is not terribly re-assuring. The pre-war inflation trend in 2022 was both a continuation of 2021’s decades-high inflation path and significantly above the average inflation path seen in the past ten years. In short, while the Russia-Ukraine war has generated a short, sharp shock to the price level in excess of 1%, this simply adds fuel to what was already a troublingly similar inflation narrative to last year’s.

If we assume PriceStats returns to its normal seasonal run rate, the annual rate of inflation will be back below 3% by the final week in December and back to 2.3% by end of March 2023 — a clear and transitory supporting trend. The challenge, however, is that PriceStats has returned at or above average monthly inflation readings for 17 consecutive months, September included. While recent monthly gains have been closer to their historic averages, the longer this run of above-average monthly readings continues, the less credible the transitory inflation narrative becomes. This would be true even if the annual inflation rate begins to fall, which it almost inevitably will in the next six months.

US: The Russian-Ukraine War Inflection Point

ECB’s dilemma, rising current and expected inflation

The war in Ukraine and its knock-on effects on global inflation pose a particular dilemma for the European Central Bank (ECB). This is not only because of the geographical proximity or the lines of contagion that run along Russia’s oil and gas pipelines into the eurozone. In contrast to the Federal Reserve that pivoted hard toward the inflation concern prior to the war, the ECB maintained its forecast that eurozone inflation would be transitory. While PriceStats provided some support for this idea toward the end of last year as the increase in the eurozone inflation rate began to ease, the rate of change of inflation turned positive again in Q1 and has leapt higher since Russia invaded Ukraine. While some of this is related to energy prices, it is notable that market-based inflation expectations, even the five years forward, have also begun to rise in tandem. The implication is that markets are less confident that the ECB is correct in its assertion that inflation is temporary and will fall rapidly. In response, the ECB is talking more meaningfully about the potential to tighten policy this year, although this is complicated by the sharp downward revision to growth that is occurring at the same time.

Eurozone: PriceStats vs. Euro Inflation Expectations

Emerging inflation problems

In a similar vein to developed markets, hopes that emerging market (EM) inflation would peak in Q1 have been dashed. Our aggregate EM inflation index has now jumped to over 15% year-over-year (YoY) and most countries’ annual inflation rates are at or close to their highest levels since our PriceStats series began (in most cases this is more than 10 years ago). And the worst may be yet to come. While fuel price inflation across emerging markets has peaked to just over 30% (YoY), consumer food price inflation, already at a decade high before the Russia-Ukraine war, has yet to respond to the sharp price rises in some foodstuffs, especially wheat. The only good news is that most EM central banks had already begun, and in some cases almost completed, their tightening cycles last year, which means some are “ahead of the curve.” However, that doesn’t mean that inflation as a potential political issue is going to go away anytime soon. If consumer food prices start to re-accelerate too, EM inflation could yet pose significant challenges.

EM: Consumer Food Price Yet to Respond