Why is inflation so important in 2022? Since in the current state of affairs, it is the one that will determine how much the central banks will raise the interest rate and hence the effect on the markets is completely clear.
Let’s start with the good news – it is likely that in a year’s time the global inflation environment will be lower compared to today. All this assuming we do not see commodity prices continue to soar and we do not see another inflationary effect of opening up economies as we have seen this year.
However, these end effects are known and are already fully implied in markets and forecasts. The challenge is to try and understand what the future holds for us in terms of other inflationary factors and especially the disruption in supply chains, the energy crisis and the local level of each country, how wage pressures and warming of the real estate market will be reflected in core inflation.
With the fading of end effects, by 2022 we will be able to see much better what inflationary environment the world really is in, and at least in our view, it is an environment that would justify a much tighter monetary policy relative to previous years.
At least in our view, pressures on supply chains and the energy crisis in Europe are expected to generate another round of inflationary pressures on many products around the world in 2022, pressures that are not yet quite embedded in analysts’ forecasts. In addition, the jump in wages and the warming of real estate markets in a particularly high inflationary environment may produce sharper inflation dynamics in the services industries both in the world and in Israel, so in our view, inflationary risks continue to be high.
With the background of the world economic data clearly signaling an economic slowdown – both due to the rapid closing of GDP disparities in Europe and the US, and also due to the effect of the new restrictions on activity due to Omicron – The challenge for central banks will be to navigate in an environment of clear economic slowdown characterized by high inflation.
Could Omicron be the solution to the health problem? Possibly, but in that case, it may bring risks to markets from a different direction.
As always with regard to the virus one must give the following reservation – the uncertainty about the economic horizon is high. However, after almost two years, we may have learned a thing or two also about the epidemiological aspect, and especially about the response of governments.
Let’s start with the good news, as the days go by, the studies that come out clearly signal that omicron is indeed very contagious and probably the effectiveness of the vaccines against it is lower, yet the disease it produces is very mild. The truth? This is exactly what evolutionary biology implies to us that will eventually happen, a more contagious but much less deadly virus.
In this sense, omicron may signal the end of the epidemic phase and beyond the endemic phase (which may have been moved to a long time ago). And if that’s not optimistic enough, now the treatments are also moving to the center of the stage after the FDA approved (emergency permit) Pfizer’s antiviral pills and soup that definitely look like factors that change the rules of the game.
Now, all that remains is to get more confirmation (through research) that the disease from Omicron is really mild, allowing governments – which are naturally difficult to change perceptions so quickly – to change access to start living alongside the virus, which does not seem to go anywhere for many, many years.
If this scenario does materialize, then this is a dissipation of one of the most significant risks to global economic activity. However, in such a case one must take into account that It is possible that central banks will work to reduce monetary policy more aggressively, which will further increase the risks surrounding the stock market., Which in any case is at the beginning of the new year at a particularly sensitive point.
The writer is the chief economist of Psagot Investment House