The world economy is being rebuilt to an inflationary scenario

Weekly wrap

10:00  June 19, 2021

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The world economy is being rebuilt to an inflationary scenario

foto: yandex.net

Time period: 12 – 18 June 2021

Top news story: Social policy is being increasingly affected by price growth, which we began to warn of months ago. Example: Housing Affordability Index:

Housing Affordability Index (the higher it is, the more housing is inaccessible). Source: Bloomberg

Generally speaking, price increases themselves have already become part of the normal economy of 2021, as is clear from the next section of the Review. And it’s just official data, the real situation can be a lot worse (than we’ll say).

As promised, we continue to keep an eye on the American labor market. There continue to be problems. In the previous survey, we said that employers could not hire staff, and this week there was a sharp increase in the number of initial claims by the unemployed – 412,000 vs the projected 360,000. A week ago there were 376,000, almost 10% growth. Let us recall that before the crisis, the figure of 400,000 a week was considered a critical indicator: exceeding that figure was a sign of serious problems. Now, of course, such estimates are meaningless, as almost all performance is in a crisis area.

Macroeconomics

All of China’s major indicators slowed down more than expected in May.

  • Investment:

China Fixed Asset Investment

  • Industrial Production:

China Industrial Production

  • Retail Sales:

China Retail Sales YoY

It should be noted that the positive results in this case should not be misleading: if the real price increase is higher than the official figures (which is almost certainly the case), then all the figures given should be reduced by the difference between real and official inflation as the due outcome.

Japan’s activity in services declined in April:

Japan Tertiary Industry Index

Sales in Canadian manufacturing -2.1% per month (mainly due to the transport sector: -23.6%):

Canada Manufacturing Sales MoM

And then inflation indicators begin.

Wholesale prices in India + 12.9% per year – the highest since 1998:

India Wholesale Price Index Change

US export prices +17.4%, unprecedented increase in all 38 years of observation:

Import prices + 11.3%, peak since 2011:

United States Import Prices

PPI (Producer Price Index) of Russia + 35.3% per year, a record somewhere since the beginning of the century:

Russia Producer Prices Change

PPI Britain 4.6% per year, peak since January 2012:

German PPI + 1.5% per month (peak since 2008) and + 7.2% per year (similar):

PPI Canada 16.9% per year – not recorded since January 1975; sawn softwood looks the most spectacular/efficient (+235.5%). This is in Canada!

US PPI + 6.6% per year, highest since 2008:

United States Producer Prices Change

Without food and fuel 4.8%:

United States Producer Prices Final Demand Less Foods and Energy

If we look at all goods – not just final demand, we’ve already pointed out that in the US, when calculating the PPI, the price of intermediate goods in the process chain is not counted – then 19.0% per year, the highest since the end of 1974:

CPI (Consumer Price Index) of Germany at the top since 2011 (+ 2.5% per year):

CPI of Canada at its peak since 2011 (+ 3.6% per year) amid soaring house prices (+ 11.3%, the highest since 1987):

Canada Inflation Rate

Without food and fuel in Canada + 2.8% per year, the highest since 2003:

CPI Argentina + 48.8% per year, however, there it is far from a record, but rather a routine:

Argentina Inflation Rate

Housing prices in Australia surged from 2009 (5.4% per quarter) at most in the first quarter:

Australia House Price Index QoQ

The Housing Market Index in the United States is minimal in 10 months (though still very high) due to the high cost of building materials and houses:

United States Nahb Housing Market Index

US Building Permits in May -3.0% per month to 7-month low:

United States Building Permits

The average earnings in Britain are 5.6% per year, the highest since 2007:

Inflation expectations in the United States (New York Fed issue) at their peak for all 8 years of observation:

United States Consumer Inflation Expectations

Retail sales UK in May -1.3% per month, without gasoline -2.1%:

United Kingdom Retail Sales MoM

Retail sales in the USA in May -1.3% per month, without cars -0.7%:

U.S. Retail Sales

The United States Federal Reserve has not changed policy, but has sharply tightened inflation and rate forecasts, with two increases expected by the end of 2023, instead of zero. We note that the announcement was agreed upon at the Biden-Putin summit in Geneva, so that a positive reaction on the dollar created the illusion of Biden’s success.

The Brazilian Central Bank raised rates by 0.75% to 4.25%, promising to do the same in August.

The Central Bank of Indonesia left everything as it was. The Central Bank of Turkey and the Central Bank of Japan did the same thing.

Summary. The world economy is being adjusted to an inflationary scenario, and price increases are being taken into account at the very beginning of technological chains. Demand constraints work poorly: on the one hand, citizens are getting more money as part of irregular income (which makes them reluctant to go to work), and on the other hand, almost any consumer product becomes an interesting object for saving. This has resulted in the wreck of all the mechanisms that have been developed over many decades to sustain demand for socially significant goods (see the first section of this Review).

On the other hand, given the mounting inflationary pressures, the previous Review’s estimate of the total annual price increase in the US of 10-12% becomes very optimistic. In light of this, it should come as no surprise that the US Federal Reserve is announcing a rate hike. But with the amount of debt that is accumulated in the US, the increase in the cost of credit will result in the inability to service these debts (interest payments will become too large), causing an avalanche of bankruptcies.

Banks will thus have problems, and this will require, if they are to be rescued, the attraction of new issuances with corresponding price increases. The inflationary spiral will take another round. The only way out of this situation is to eliminate structural imbalances, which will lead to a substantial decline in the standard of living of the population.

We wish our subscribers a successful weekend and a great summer vacation!


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