Inflation and Interest Rates

Inflation and Interest Rates

As we officially entered 2022, the debate around inflation has only become more intense. The BoE took lead and increased interest rates just before the year end. Investors, observers and policy-makers are already expecting 3 – 4 increases by Federal Reserve Bank of America (Fed) which hitherto was stuck with its transitory inflation narrative. Even so, debate around Price Controls have started to take hold – here is an incredibly argued article by Isabella Weber in The Guardian on this issue.

Inflation in Turkey has touched a worrisome 36 percent as the Lira crisis continues to unfold. Erdogan is bent on slashing interest rates while promoting the use of Lira and shun Dollars. All of this sounds good in a speech to incite crowd however, in reality the consequences will be dire. Furthermore, emerging markets continue to bear the brunt of rising prices and soaring food price inflation for instance, Pakistan registered a CPI of 12.3 percent and “edible items” was the main source of this increase. As inflation in the U.S. hit 40 years high, Bloomberg estimates that the interest rates would end up being 2 percent by end of 2023 and 1 percent for BoE for the same time period.

Notwithstanding the inflation problem, an estimate by Centre for Economic and Business Research (CEBR) says that the global economy will grow by 4 percent in 2022, down from 5.1 percent as estiamated in 2021. I don’t know whether it will be possible as Omicron continues to increase and governments are once again opting for lockdowns. Thousands of flights has been cancelled recently and it will impact the deamnd for derivatives of Crude oil such as jet fuel. Mobility is already becoming stagnant if not going down. Moreover, the rising interest rates will create issues for governments across the globe – as I explained in my latest End of Year blog. Uncertainty remains high. Supply chains are still clogged. Oil prices seemed to have stablilized recently and markets are waiting for yet another OPEC meeting – the chances are that they will continue to increase 400,000 bpd and actually there is not a need for further increases as well.

Global manufacturing output has remained strong till the year end but there are genuine concerns whether this trend will be stable for the coming year. We will of course be tracking the PMI numbers.

All in all, it is only the beginning of the year 2022, and amongst other issues, inflation remains the most significant and dangerous one.

Join us this week on our regular shows as we try to dig in the numbers and try to track the trajectory of global economy and crude oil markets for our viewers.