Weekly Winzer: increasing inflationary pressure

There have recently been increasing signs that inflation in the United States could remain at elevated levels for longer than expected. This has put particular pressure on the bond markets: bond prices have fallen amid rising yields. The 10Y US Treasury bond yield now stands at 4.63%

For the financial markets, this raises not only the question of how inflation will develop, but also how central banks will respond to the increased risk of inflation.

Energy prices are keeping inflationary pressure high

Inflation rates rose across the board in March and April. This comes as little surprise, however: with the de facto closure of the Strait of Hormuz, energy prices have soared, significantly increasing inflationary pressure.

Yet even inflation indicators excluding energy components show a strong upward trend in some cases. In the USA, consumer price inflation amounted to 3.8% year-on-year in April. Excluding energy and food, prices rose by 2.8%. Numerous indicators that estimate the underlying trend send a similar message: inflation is hovering around 3%. The measure of inflation favoured by the new Fed Chair, Kevin Warsh – the trimmed mean – was at 2.8%.

Higher inflation rates are not limited to the United States

We can observe a pattern in many countries: inflation in the services sector has remained stubbornly above 3% for some time now. In the USA, the year-on-year rise in producer prices was even steeper, at 6.0%. Excluding the volatile energy and food components, the price increase still stood at 5.2%. Import price inflation was also strong – naturally driven mainly by higher energy prices. But even excluding oil, the rise was significant. In some cases, marked price increases can be seen in the technology sector (semiconductors).

High inflation rates are not only being observed in the United States. In Japan, producer prices rose in April – primarily due to energy prices – to 4.9% year-on-year. Prices had already been rising in the first quarter.

Inflation could become even more entrenched

The price data have reinforced the impression that inflation could become entrenched at a level well above the central banks’ 2% target. The arguments in favour of this are as follows:

1. Solid global economic growth.
2. A boom in artificial intelligence, accompanied by investment surges and supply bottlenecks, for example in semiconductors.
3. Rising energy prices, which could trigger further price increases in other sectors in the coming months (spill-over effects).
4. There is also a risk of energy prices rising further.
5. Inflation has now been above 2% for the sixth consecutive year. The renewed rise in inflation increases the risk that long-term inflation expectations among consumers and businesses will also drift upwards.

Growth remains robust

Global cyclical growth indicators point to average to strong growth. In the USA, the aggregate of indicators points to annualised GDP growth of about 4% in Q2. The latest retail sales figures suggest a contribution of 1.9 percentage points to private consumption. The key message here is that rising energy prices have not yet reduced purchasing power as sharply as feared.

New Fed Chair has to hit the ground running

The combination of strong inflation indicators and resilient growth indicators is pushing central banks towards a more hawkish stance. For some central banks, more significant interest rate hikes are already priced in, even though economic growth remains on the lower side (European Central Bank: 0.73 percentage points, United Kingdom: 0.59 percentage points, Japan: 0.48 percentage points).

For the US Fed, only (or at least) a 0.16 percentage point rise in the key-lending rate is priced in by the end of the year, despite strong economic growth. This means there will be no settling-in period for the new Fed Chairman, Kevin Warsh. The key question is how much weight he will give to the different objectives of price stability (higher interest rates curb inflation), full employment (lower interest rates support growth) and – implicitly – fiscal stability (low interest rates increase budgetary leeway). The risk is that a stance that is too dovish will cause inflation expectations to rise.

 

This document is an advertisement. Unless indicated otherwise, source: Erste Asset Management GmbH. The language of communication of the sales offices is German and the languages of communication of the Management Company also include English.

The prospectus for UCITS funds (including any amendments) is prepared and published in accordance with the provisions of the InvFG 2011 as amended. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in conjunction with the InvFG 2011.

The currently valid versions of the prospectus, the Information for Investors pursuant to § 21 AIFMG, and the key information document can be found on the website www.erste-am.com under “Mandatory publications” and can be obtained free of charge by interested investors at the offices of the Management Company and at the offices of the depositary bank. The exact date of the most recent publication of the prospectus, the languages in which the fund prospectus or the Information for Investors pursuant to Art 21 AIFMG and the key information document are available, and any other locations where the documents can be obtained are indicated on the website www.erste-am.com. A summary of the investor rights is available in German and English on the website www.erste-am.com/investor-rights and can also be obtained from the Management Company.

The Management Company can decide to suspend the provisions it has taken for the sale of unit certificates in other countries in accordance with the regulatory requirements.

Note: You are about to purchase a product that may be difficult to understand. We recommend that you read the indicated fund documents before making an investment decision. In addition to the locations listed above, you can obtain these documents free of charge at the offices of the referring Sparkassen bank and the offices of Erste Bank der oesterreichischen Sparkassen AG. You can also access these documents electronically at www.erste-am.com.

Our analyses and conclusions are general in nature and do not take into account the individual characteristics of our investors in terms of earnings, taxation, experience and knowledge, investment objective, financial position, capacity for loss, and risk tolerance. Past performance is not a reliable indicator of the future performance of a fund.

Please note: Investments in securities entail risks in addition to the opportunities presented here. The value of units and their earnings can rise and fall. Changes in exchange rates can also have a positive or negative effect on the value of an investment. For this reason, you may receive less than your originally invested amount when you redeem your units. Persons who are interested in purchasing units in investment funds are advised to read the current fund prospectus(es) and the Information for Investors pursuant to § 21 AIFMG, especially the risk notices they contain, before making an investment decision. If the fund currency is different than the investor’s home currency, changes in the relevant exchange rate can positively or negatively influence the value of the investment and the amount of the costs associated with the fund in the home currency.

We are not permitted to directly or indirectly offer, sell, transfer, or deliver this financial product to natural or legal persons whose place of residence or domicile is located in a country where this is legally prohibited. In this case, we may not provide any product information, either.

Please consult the corresponding information in the fund prospectus and the Information for Investors pursuant to § 21 AIFMG for restrictions on the sale of the fund to American or Russian citizens.

It is expressly noted that this communication does not provide any investment recommendations, but only expresses our current market assessment. Thus, this communication is not a substitute for investment advice.

This document does not represent a sales activity of the Management Company and therefore may not be construed as an offer for the purchase or sale of financial or investment instruments.

Erste Asset Management GmbH is affiliated with the Erste Bank and austrian Sparkassen banks.

Please also read the “Information about us and our securities services” published by your bank.