Markets in quicksand: inflationary risks persist

Amundi
By November 15, 2021 10:47

Markets in quicksand: inflationary risks persist

Like it or not, the alignment of the planets regarding inflation will last for a while. October saw the recognition of a more permanent than expected inflation, with the IMF officially stating that we are entering a phase of inflationary risk and CBs partially admitting that inflation is proving stickier than anticipated. In our view, this adds an extra dimension to the idea that markets are moving in quicksand and the permanent inflation narrative is getting a boost. The mismatch between supply and demand is widening, with shortages all over the world and full economic reopenings in the main markets fuelling demand. Supply bottlenecks are intensifying and the astonishing rise in energy and food prices is further driving inflation dynamics in a vicious circle. The additional factor that could trigger further inflation rises is the wage component. Persistent rises in prices will, in our view, push workers to ask for wage increases. Given the known risks regarding the I (inflation) part of the equation, the market’s focus will return to the G (growth) side. Are we heading towards a deceleration around potential or below, therefore feeding stagflation fears? On growth, all economic areas (US, Europe, China) face some challenges. Our base case is for a controlled deceleration entering 2022, while further fiscal support to address the different open issues should kick in next year and help reinvigorate growth throughout 2022. Longer term, the energy transition is the key priority that might once again fuel an additional global fiscal push. COP26 will be a key milestone to watch to assess the future path of policy actions. Market reactions will depend on CBs and there is no room for mistakes on their side. We think any action by CBs will be incredibly gradual because there is little that CBs can do to address supply-side inflationary forces. 

Amundi
By November 15, 2021 10:47

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