Inflation rates have spiked in many countries due in part to the strong economic recovery from 2020’s virus-linked downturn, the ongoing disruption in global supply chains, and the recent spike in energy prices.
Goods prices have been particularly impacted. In the US, goods prices tended to fall in the years leading up to the pandemic, but record levels of government support and reduced demand for services both contributed to higher goods orders.
That demand led to a surge in Asian exports. Many developed countries reported record levels of new orders, even as prior orders were backlogged. At the same time, inventory levels were low in many countries, which added to price pressures.
The strong economic recovery has boosted wages in some countries. In the US, the labor market is exceptionally tight, with more job openings than people that are unemployed. So far, wage pressures have been most evident among lower paid and younger workers.
Home prices in the euro area, Japan, the UK, and the US have also all spiked in the last year, outstripping income growth in those countries. Alongside home prices, energy prices have also soared, as investment and oil & gas rig counts remain at low levels.
The expectation of higher rates, reduced government support, and a rebalancing of goods/services demand, along with a belief that the functioning of global supply chains will improve, is likely behind the market’s belief that inflation will moderate.