REALITIES: The world has seen common covid and energy inflation shocks. But the level and drivers of inflation still differ a lot (see chart). This has big implications for central bank policy, recession risks, and currencies. The US inflation problem is the hardest to solve. Underlying drivers, from housing to wages, are frustratingly sticky. This sets markets up for a rocky recovery path into 2023. More energy-focused European inflation could decline surprisingly fast, and with clearer market upside to very depressed sentiment and valuations. European natgas prices have nearly halved the past two weeks. Asia is the inflation outlier and market haven, with entrenched overcapacity and deflationary forces, and lower interest rates and growth risks.
US: The latest data shows the headline inflation rise easing to 8.3% versus a recent 9.5% peak. But underlying and persistent core inflation rising to 6.3%. Wage pressures are high, with twice the job openings to unemployed. Whilst near 20% house price rises pressure lagging shelter costs up. This will keep markets on edge, and Fed on the inflation fighting from foot. Recession and earnings risks, driven by slowly spreading housing and labour market pain, are both rising.
EUROPE: The continent has taken the energy-driven price surge on the chin, without the same wage growth or government spending supports seen in other parts of the world. This is now changing. Recession fears are easing as fiscal spending ramps up and gas prices slump. 5-year forward inflation expectations are a similar 2.5% in Germany as the US, though UK a higher 4%.
All data, figures & charts are valid as of 13/09/2022