Highly dynamic inflation rates

at its 2021 level of 3.75 percent in 2022 as long as the pandemic does not result in any major disruptions. South Africa fared much better than expected throughout the pandemic in 2021 (up five percent) and is expected to grow at a more moderate rate of two percent this year. Nigeria is again set to grow by 2.5 percent this year.

Highly dynamic inflation rates

Global inflation trends are under the predominant influence of the pandemic. While industrialised countries recorded an inflation rate of only 0.7 percent in 2020, it climbed to well over three percent in 2021. Momentum in inflation should ebb slightly in 2022 with IMF expecting inflation of just over 2.5 percent and the OECD expecting 4.2 percent for a similar group of countries (OECD 2021). Inflation in the emerging countries has not changed as much with inflation expected to stay high at close to six percent (IMF 2022).

Inflation trends and monetary policy highly divergent

In recent months, the pace of inflation has continued to pick up in Europe and in the United States, while remaining low in the major Asian countries. The central banks in the United States and in European countries have been caught by surprise by the force of this upturn, the continuing bottlenecks in various industries and several one-off factors, as have the markets that have had to constantly upwardly revise their forecasts. Inflation has reached levels not seen in more than 20 years and has consequently sparked public debate about the resulting risks, particularly in Germany. The major central banks have had to increasingly justify their expansionary monetary policy and gradually turn the lever back to a tighter course. In other countries, particularly in China and Japan, inflation has remained low due to the economic slowdown. Some industrialised and emerging countries have already responded to the temporary pressure by tightening up their monetary policy, including Australia and New Zealand, Brazil, Russia and South Korea, as well as some eastern European countries (Poland, Hungary, Czech Republic). The picture remains mixed.

Inflation surges in United States and Euro area

The increased upwind in prices in North America and Europe continues to be dominated by the yoyo effect of the upturn in the wake of the pandemic, the structural shift in demand from services to goods, several temporary factors on the energy markets (with a short-term impact on inflation) and extraordinary factors related to the pandemic such as the closure of ports, the blocking of the Suez Canal by a transverse container ship, and the logistic chaos in container shipping, particularly in California. The situation has been exacerbated by strong global demand, supported by expansionary monetary and financial policy, especially in the United States. The economic policy decisions of some countries also contributed to the overall momentum, such as the six-month reduction in the valueadded tax rate and the introduction of a national emissions trading scheme in Germany, as well as the expiry of individual labour market measures in the United States. Most one-off factors will subside in the coming year, with only the semi-conductor crisis likely to last until into 2023.

Inflation in the United States addressed with monetary policy response

In the United States, the trend in inflation over the last two years has sparked a major debate on monetary policy since the summer. Dominant in the debate is the question of whether the pressure on

prices is only temporary and therefore be ignored or whether it is a stronger and broader trend that requires a response. The prevailing opinion is that the Fed is responding too late. Monetary policy is now in tightening mode.

In December last year, the United States central bank tightened its monetary policy to counteract the broadened upward trend in prices. The Fed accordingly decided to dial back its bond purchasing programme by 30 billion U.S. dollars a month. With this step, the Fed closed the debate on whether the pressure on prices is temporary or not and has moved its focus to achieving the second target alongside inflation, that of maximum employment. Based on statements by the Fed, the target for employment (bringing down the unemployment rate to 3.5 percent) is expected to be reached in the course of the year. Furthermore, the median expectation among Federal Open Market Committee’s (FOMC) members of interest rate raises increased substantially, rising from 0.3 percent to 0.9 percent for 2022, from one percent to 1.6 percent for 2023 and from 1.8 to 2.1 percent for 2024 (Fed 2021). At the same time, the Fed has increased its inflation forecast for the Personal Consumption Expenditures Price Index in 2021 by one whole point to well over five percent (5.3 percent), while dropping expected growth for the year by half a point (to 5.5 percent). For the current year, on the other hand, the Fed has upped its growth forecast slightly to four percent, with inflation expected to be at 2.6 percent and a higher core inflation of 2.3 percent. The market is therefore anticipating a termination of the purchasing programme as early as March 2022 and, on average, three interest rate hikes of a quarter percentage point each in the current year, with further raises expected until 2024/25, to bring the key interest rate to just over two percent. The Fed will naturally take action based on how the figures develop and factor in any negative effects caused by rising infection rates.

Factors playing into the inflation equation in the United States include the catch-up and base effects fuelling energy and commodity prices, the semiconductor supply problems (which implicitly affect the price trends of used vehicles) and statistical one-off effects as well as an overstraining of production potential triggered by the expansionary financial policy approach of the Biden administration. The expectation of some leading Democrat economists that the mix of pandemic effects, supply problems and expansionary demand from the public sector will trigger inflation levels that need to be tackled by a monetary policy response has therefore proved accurate.

ECB carefully reverses to tighten monetary policy

The European Central Bank also tinkered with its prediction of growth and inflation going forward and its monetary policy in December. The ECB is now forecasting growth in the Euro area of 4.2 percent in 2022, and inflation of 2.6 percent in 2021 and 3.2 percent in 2022 (ECB 2021). It has raised its forecast for inflation substantially, upping it by one and a half points for the current year. The ECB now also predicts a harsher pandemic scenario with growth in the Euro area of only 1.5 percent in 2022 (2.2 percent and 2.5 percent for 2023/24) and inflation of 3.1 percent for the current year before dropping down to 1.4 and 1.3 percent in the following years. The key interest rate according to the main scenario of ECB will remain below two percent throughout the whole projection period of three years.

As expected, the ECB has decided to terminate net purchases under the Pandemic Emergency Purchase Programme PEPP in March. At the same time, the maturing principal payments will be reinvested until the end of 2024, one year longer than previously planned. It will adopt a flexible approach in order to retain the option of making net purchases of Greek government bonds if necessary. Furthermore, the volume of the Asset Purchase Programme (APP) will be increased from

20 to 40 billion euros in the second quarter and to 30 billion euros in the third quarter. From October, plans are to continue purchases to the volume of 20 billion euros as long as the monetary policy support is required. The ECB’s decision also included an indication that it would terminate the third series of targeted longer-term refinancing operations, TLTRO III, in June.

Inflation trend as dynamic as it is unexpected

The ECB has also come under pressure in public debate sparked by the monthly inflation rate figures. The level of inflation recorded for the Euro area overall in November 2021 year on year was 4.9 percent, far exceeding its record level of 2008. The three-month average (September to November) for inflation was at slightly over four percent. For Germany, the Bundesbank expects an increase in consumer prices (HICP) of 3.6 percent in the current year and a lower 2.2 percent for 2022 and 2023. Assumptions are that the inflation rate peaked in December last year (Deutsche Bundesbank 2021).

Alongside the same base effects as in the United States, the prices of energy, commodities and intermediate goods, and the tax and climate protection measures in Germany, other factors at play in the Euro area additionally stoked the latest spike in inflation. The statistical adjustment of the basket of goods reinforced the price increase measured by a few tenths of a percentage point. Core inflation (excluding price trends in energy and foods) was much lower although it also rose steeply, climbing to 2.6 percent in November. The three-month average was at around two percent.

Energy prices fuelled by many one-off factors

Energy prices continued to rise until October, when some prices began to fall before increasing again from the middle of December onwards. The price of oil has returned to pre-pandemic levels which means that it has more than doubled since June 2020. The gas price on the spot market has risen dramatically. The price of coal has increased eightfold. On the oil market, production cuts by OPEC, frost in Texas in February 2020, and hurricane Ida in August all limited supply. Similar one-off effects cut coal output by five percent. Developments on the gas market have been dominated by five factors: high demand for LNG in China and South America, the harsh winter 20/21, depleted stocks in summer (about 50 percent of the normal level), restocking in Russia and a lull in the EU in 2021 (consequently gas required for electricity generation). Rising energy prices are additionally driving up import and consumer prices. The markets are expecting prices for both Brent crude and WTI crude to drop substantially in spring 2022. The gas market is expected to remain tight for several months.

Bottlenecks in supplies escalating producer prices

Supply-side bottlenecks have also pushed input and producer prices up, exacerbating general price trends. Meanwhile, over 90 percent of companies (in Germany) have been affected by rising input prices which is also lifting producer prices. Producer prices increased more than they have for a long time at last count, with increases well into double digits for the Euro area, the highest rates recorded since the data series began in 1996, while in Germany the increase of over 15 percent is unparalleled since the 1970s. The increase in producer prices drives up consumer prices and the general rate of inflation as producers cannot absorb the increased costs exclusively by decreasing their profit margins.