Debt Market Monitor (December 2021)

Debt Market Monitor (December 2021) 7 décembre 2021

Inflation has staunchly encamped itself in the price of most goods and services. The most recent U.S. consumer price index (CPI) inflation report showed that prices rose across the board in October – by a lot. Suffice it to say that things were similar in Canada and other countries around the world.

Overall, prices climbed 6.2% year-over-year (the largest increase since November 1990) and rose 0.90% compared with the previous month. Higher prices were broad-based, as reported by the Bureau of Labor Statistics (BLS), with substantial increases seen in the indexes for energy, shelter, food and new and used vehicles.

Inflation is not looking transitory. One of the Federal Reserve’s (the Fed) jobs is to keep price growth stable, and Fed officials have been telling everyone to expect higher inflation in the near term as the economy gets back to normal. They also said that current inflation pressure should give way to healthier price growth over a longer horizon. In a recent press conference following the meeting of the Fed, Chair Jerome Powell said that “transitory” was a tricky thing to define. 

The question is: should we be worried about high inflation? Supply chains and businesses need a little time to work out the knots involved in reopening the global economy. We now know that “transitory” is turning out to be much longer than what the general anticipation was.

The Fed recently announced that it will buy fewer bonds over time, which should take some of the rocket fuel out of the economy. However, with the labour market not yet recovered from its pandemic losses, it should be a while before the Fed hikes interest rates – a typical maneuver used when inflation runs hot. With the Fed starting to taper its stimulus and possibly being forced to hike interest rates sooner due to rising inflation, rate hikes might not be enough to reverse inflation because the sources of inflation involve supply-chain bottlenecks and fiscal spending – two areas that the Fed does not control.

How long this “transitory” inflation will last is anyone’s guess right now.