Simona Striževska, Economist at Citadele subsidiary CBL Asset Management
The question everyone is grappling with, from heads of leading world central banks to consumers: when will consumer prices stop climbing? In September, inflation figures in the U.S. and Eurozone were once again higher than many had predicted. While we can at least start to see the first signs of stabilization in the US inflation dynamic, Eurozone inflation continues to set new records. At the start of the autumn, consumer prices in the Eurozone increased by 10% over the year. Price increases are felt differently by consumers nation by nation, with inflation ranging from 6.2% in France to more than 20% in the Baltic nations.
Higher-than-predicted consumer price increases have also forced central banks to step up their efforts to fight inflation. A few months ago, experts predicted central bank interest rates to stabilize around 1.5-2.0% in the Eurozone and 3.5% in the U.S. According to the latest financial market figures, the peak in base interest rates in the Eurozone is now seen closer to 3%, while, in the U.S. in the 4.75-5.0% range. This means that governments, businesses and consumers will find borrowing more expensive, and the risk of systemic incidents in the financial markets will continue to increase.
Of course, one of the sources of high inflation is increase in resource prices, which continues to feed into the prices of goods and services. In Europe, this has been exacerbated by regional gas and electricity price increases. However, strong demand is an equally important source of this uncomfortably high inflation. As wages fail to keep up with pace of inflation, consumers are saving less and spending savings accumulated during the pandemic, as well as, in the case of the U.S., borrowing more.
Demand-driven inflation is most directly felt in the U.S., where almost two-thirds of the consumer price increase is attributable to goods and services categories not directly affected by resource prices, or core inflation. At the same time, the rapid price increases caused by the post-pandemic consumption boom in the U.S., for example, for used cars, are already starting to trend in the opposite direction. Next year, the downturn in the U.S. real estate market orchestrated by the Federal Reserve System may also start to play its part in slowing core inflation; increased rents currently make up one-quarter of the 8.2% inflation registered in the U.S.
Against the backdrop of rising prices, the current consumer sentiment is at its most pessimistic level since records began in the mid-1980s. However, despite this negativity and reduced purchasing power, retail turnover in nominal terms continued to grow in the Eurozone. This allowed businesses to pass their growing expenses to the consumer, making products and services not directly linked to resource inflation more expensive. Core inflation in the Eurozone reached a record high of 4.8% growth in September.
Since recovering from the pandemic, consumer prices and future inflation projections have only gone in one direction: up. In the near future, the picture could become more complicated. Early signs emerge that the Eurozone consumer is surrendering to inflation: the number of goods purchased is slowly decreasing, new orders in the manufacturing and service sectors are falling, and stocks of unsold goods are increasing for businesses.
The situation in the resource markets is far from unambiguous, but here, too, worries of a decrease in demand on a global scale have helped to partially balance out the risks linked to tight supply. Although still higher than at the end of last year, food and oil prices in the global commodity markets have stabilized close to prewar levels. At the same time, OPEC’s supply curbs and other supply considerations, as well as gas to oil switching, could keep oil prices at elevated levels going forward. In the fragmented European gas market, where prices have fallen to less than half of their August peak, price risks remain higher than elsewhere. Prices are still at least 5 times higher than last summer, when gas prices started increasing.
Over the coming months, economists and central bankers will continue to search for a turning point in inflation dynamics. The first credible signs of slowing inflation will allow for a softer central bank rhetoric regarding monetary policy.
Citadele Bank’s subsidiary, IPAS CBL Asset Management, is one of the leading and most experienced financial asset management companies in the Baltics, employing globally-recognised fund managers. It has managed investment portfolios since 2002. Meanwhile, in 2003, it became one of the first in Latvia to manage level 2 pension savings. CBL Asset Management has the largest team of managers in Latvia, which regularly analyses the financial and capital market and macroeconomic trends using their experience and the latest technologies, investing pension savings in both large international and local Latvian businesses, as well as in the bonds of various countries.
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AS “Citadele banka”