8 October 2021: Chief economist sees Inflation risk

Chief economist sees Inflation risk

8th October: Highlights

  • Pill warns of continuing inflation
  • Deal to extend debt ceiling agreed
  • ECB Minutes could presage December taper

Pill worried about magnitude and duration of spike

Huw Pill, the new Bank of England Chief Economist, took to the wires for the first time yesterday to provide his view on the prospects for inflation and interest rates in the medium-term.

Pill, another of the Goldman Sachs alumni to find their way to the Central bank was expected to lean towards a hawkish stance given his past comments he has made, He feels that the balance of risks is leaning towards inflation remaining an issue for some time.

He expects higher levels of inflation to last longer than had been hoped for as the scale and magnitude of what he called transient inflation is lasting longer than expected.

He went on to comment that markets cannot expect interest rates to remain at low levels for the coming years.

As a first foray into being a mouthpiece for the Banks’ view on the economy, Pils’ comments were well received by the market. They were reasoned and considered and went some way to confirm the issues facing the country going forward.

In his speech to his Party’s Conference earlier in the week, Boris Johnson went some way to admitting that not enough was done in advance of Brexit about what is now being considered the inevitable shortage of labour that the UK’s departure from the EU has brought about.

The actual number of EU nationals who departed the UK prior to Brexit, compared to those who decided to stay, is not available but it is fail to say that those who came here purely to work for outnumbers those who arrived with their family having decided to settle in the country.

On the whole, those who moved permanently are more skilled than the workers who proved to be simply searching for work.

The EU Commissioner for Interinstitutional Relations and Foresight spoke yesterday of the need for compromise from both sides in the work to implement the Northern Ireland Protocol. Meanwhile, radical French fishermen are threatening a blockade of Channel Ports in the run-up to Christmas in order to delay the arrival of goods.

The pound is clinging on to recent gains despite the economic scenario having soured this week. Yesterday, it managed to rally to 1.3637 as selling interest builds around 1.3650. It eventually succumbed to the sellers and fell back to close at 1.3619.

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Jobless claims still moving in the right direction

The employment data released so far this week has been supportive of the view that today’s Employment Report for September will prove that the data for August was a blip, and the U.S. economy remains healthy and on track to recover strongly from the Pandemic.

With inflation becoming both rampant and semi-permanent, it has become a cliché to say that this month’s data will comprise the most important NFP for some time.

However, given that the beginning of the taper of asset purchases by the Federal Reserve may be swayed by a weaker than expected headline, this time, the cliché may actually be true.

The prediction for the number of new jobs created is around 500k. But with this being an extraordinarily difficult number to predict, given the number of estimates that are included in the data, it could miss that prediction by 250k in either direction.

A temporary fix has been found, it could hardly be called a deal, to put off any decision on the raising of the debt ceiling until early December. It is now likely that Politicians will return from their Thanksgiving Celebrations to re-enter the fray regarding a permanent solution.

The agreement was for a temporary increase of $480 billion and will expire on December 3rd.

The number of jobless claims in the week to October 1 was 328k, another positive fall which shows that workers are not losing their jobs at the rate they were at the height of the crisis.

The dollar index is struggling to make further headway following its surge higher recently. Yesterday, it fell to a low of 94.08 but ended the day virtually unchanged at 94.21.

The index is hemmed in by support at 93.80 and resistance around 94.50 and all bets are off until after 1.30pm UK time today when the data will be released.

Inflation more balanced now than in the summer

The minutes of the most recent ECB meeting were released yesterday. There were no surprises contained in them, other than an acknowledgement that inflation risks are more balanced now than they were in the summer.

That is not necessarily a good thing, since inflation appeared well controlled by the weakness of the economy then, but the genie is well and truly out of the bottle now.

Isabel Schnabel, a German Member of the ECB’s Executive Board, echoed the view that inflation remains temporary, but her definition of temporary seems to include the whole of next year. She expects inflation or fade as the Pandemic recedes, but it will take well into 2022 to come about.

With both the Bank of England and Federal Reserve admitting to both the fact that inflation, while remaining transient, will remain elevated for a more significant period, the ECB President is likely to want to keep a lid on such comments given that she has based her predictions for the medium term future of the economy on an assumption that by the end of the year, inflation would be at or close to 2%.

In fact, Christine Lagarde is continuing to stick to her belief that the rise in inflation is temporary.

The latest ECB minutes go on to say that it is the belief of the central bank that inflation will return to 2% by the end of the projection horizon.

Inflation remains driven by one-offs, such as rising energy costs, although they are close to becoming permanent according to sources at UK regulator OFGEM, and continued bottlenecks in supply chains.

German industry, in particular, is suffering from supply issues that are leading to a slowing of the German economy. While there is no threat to positive growth in quarters three and four, if the powerhouse of European industry is struggling, the knock-on effect for other economies of the EU is plain to see.

It will be interesting to see who finally wins the battle to become German Chancellor, following Angela Merkel.

Just how pro-Europe the country can afford to be given the issues it has faced over the past eighteen months could determine the future of the Union is shaped.

The euro continues to decline versus the dollar even when the index is under pressure.

Yesterday, the single currency reached a low of 1.1547, closing at 1.1551.

Have a great day!
About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”