GIULIETTA TALEVI: Inflation shock — the most important issue in the global economy right now

Whatever happened to the inflation bugbear of a few months back?

Earlier this year, US markets suffered a series of convulsions over the prospect of a jump in prices. The thinking was that higher inflation — thanks to a huge rebound in the costs of everything from oil to iron ore, lumber and coffee — would prompt the US Federal Reserve to withdraw the largesse it had bestowed on markets since the onset of the Covid pandemic in the form of quantitative easing and keeping interest rates at zero.

As it stands, the Fed isn’t withdrawing this support just yet. Its official line is that it will continue buying $120bn of mortgage-backed securities and treasuries each month until “substantial further progress” has been made on achieving its goal of 2% inflation, and maximum employment.

Yet for the past three months, inflation has come in at more than double the Fed’s target. Last month consumer inflation held fast at a steady 5.4% — a 13-year high. (In SA, of course, we’re used to far higher inflation rates — anything below 6% is a victory. But the US is used to much lower numbers.)

According to this article in the Financial Times, it’s the most important macroeconomic question there is right now: “inflation in the US has hit levels not seen in decades. At the same time, Fed watchers are struggling to get to grips with a new monetary framework under which the central bank has said they’ll allow inflation to drift above their 2% goal for a time.”

And yet, markets have barely budged in response. Yesterday the S&P 500 index rose 0.3%, and the yield on US treasuries actually fell, to 1.33%.

Clearly, no one is worried (yet) that these high prices are here to stay.

As Bloomberg’s John Authers writes, “the most positive news is that core inflation (excluding food and fuel), was only 0.3% in the month of July, compared with 0.9% in June. That sounds good. Further, the headline number, including the hugely inflated fuel products, avoided a rise. And the greatest relief for all concerned is that after three months of being blindsided by inflation numbers far higher than forecast, July’s was bang in line with average expectations.”

In that article, Authers really delves into the guts of how inflation is calculated in the US — or, as he puts it, the “ingredients that go into the Bureau of Labor Statistics’ consumer price sausage”.

The way he sees it, it’s all under control.

But as FNB Wealth and Investments portfolio manager Wayne McCurrie told BDTV last night, if inflation numbers don’t come down, and the Fed is forced to react, there is every chance a market catastrophe awaits. In this scenario, money will swiftly be pulled out of expensive equities and pumped into bonds, where the returns will suddenly look a lot better and at a much lower risk. 

For SA, a small emerging market with some rather risky fundamentals, such a pullback in investment flows could be quite devastating for the JSE and for our rand. The last thing we need right now is for our prices to rocket further. 

This is why US prices are so important to us right now — let’s not be caught napping.

Talevi is the FM's Money & Investing editor.