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SPI Management Newsletter 09.12.2022

Has the rate of inflation reached its peak?

Finally, there are hints that the pressures causing global inflation may be reaching their peak. Factory prices and delivery costs are decreasing. The price of food is decreasing, and European natural gas prices have dropped significantly from their August highs. The acceleration of inflation this year is being supported by problems in the global supply chain and increases in commodity prices, but headline statistics have also decreased. Since June, annual price rise has been declining in the US, and last month saw the first decrease in inflation in the eurozone in 17 months. Despite the fact that there are definitely good signs for the end of 2022, the job of central bankers won't get any simpler.

Although inflation may be at its peak, it is still close to four-decade highs. The time is not right to hold rates steady or reduce them. Although there may be a reduction in global pressures, core inflation, which excludes the cost of oil and food, is still strong, especially when it comes to services pricing, which are driven by wage increases. Pressures on domestic demand would be reduced by a higher credit cost. Central banks are justified to be concerned about the persistence of high prices, even while inflation expectations have decreased and there have been some early indications that the tight labor market may loosen. The US labor market is still booming; last month, hiring and earnings exceeded expectations.

According to monetary policy theories, central banks must raise interest rates above "neutral" to prevent the economy from contracting over that level. The BoE and Fed may already be there, with the ECB closing in, according to some metrics, even though estimates vary and evolve over time. It is difficult to decide how much higher to go and what level to remain at, even when this cutting point is achieved.

It is also hard to predict just how much demand will be drained by potential recessions that are likely to be sparked by rising prices next year, just as the lingering impacts of rate hikes continue to accumulate. Even if inflation may have peaked, it is still far too early to say that it has been defeated.

What to anticipate next as China loosens its Covid restrictions

Analysts note that although mainland China has loosened many of its strict Covid rules, the country is still a long way from quickly reverting to pre-pandemic conditions. On Wednesday, national officials unveiled a series of significant adjustments aimed at facilitating domestic travel, preserving commercial operations, and enabling Covid patients to quarantine at home.

Daily Covid infections in mainland China, which are typically asymptomatic, reached a record high of over 40,000 in late November. Since then, as towns lowered their demands for virus testing, the number has decreased. According to a Goldman Sachs research on Dec. 4, the process for China to reopen may take a few months, with an increase of infections anticipated.

While the revisions were welcomed by many with relief and encouraged online speculation of freer domestic travel and perhaps even future foreign travel, there was also a sense of anxiety about what lay ahead. As local governments make adjustments, there have already been some inconsistencies in how the rules are applied.

The Chinese economy will start to recover when Covid regulations are loosened, but the coming months will be difficult, according to experts, as a wave of infections is anticipated to sicken a significant portion of the workforce and put pressure on the healthcare system. As the economy moves away from strict public-health standards, disruption is still expected, and definitely relaxing Covid regulations is not a panacea.

Adapted from WSJ, CNBC, FT, Forbes, Reuters

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