The UK government has also asked UK brick makers to prepare to slow production in case the shortage of energy necessitates energy rationing. High-usage industries, such as the brick making industry, are often the first to be affected by energy rationing, as the priority shifts to keeping the power on for domestic consumers. This is likely to have a further knock-on effect on the construction industry as housebuilders and construction companies are heavily reliant on brickmakers.
The root cause of both stories goes back to the awful scenes we see being played out in Ukraine. However, even if peace broke out tomorrow it is naïve to assume that Russia’s supply of natural resources would return immediately to pre-war levels. Many of these additional supply chain shocks are likely to remain, even if below current crisis levels.
The surge in energy and other prices that we are currently experiencing is unlikely to be repeated in 12 months’ time, so some of the astronomical year-on-year data prints for both headline and input prices will ease. However, the debate around inflation and central bank policy is centred on whether longer term inflation expectations are rising and therefore whether central banks feel they are losing control of those expectations and therefore of inflation itself.
The expected 5-year forward expected inflation rate for Europe is now back at levels not seen since 2013, while US 5-year forward expected inflation is at levels not seen since 2014. It is important to bear in mind that European 5-year forward expected real rates are -1% and US forward real rates are -0.45%. This highlights the dilemma for the Fed and other central banks – they are facing back-to-back supply shocks, delivered (in economic terms) in double quick time. This comes at a time when many in the ECB (and other central banks) realise their ability to change that supply dynamic is limited through monetary policy. However, monetary policy is all they’ve got and they can’t just sit back and do nothing as the current level of negative real rates will compound the problem.
However, regardless of whether or not that is correct, we are already on the path to positive real rates and may experience something similar to the levels seen in 2018. The process will take 12-18 months before we can assess whether that policy shift is justified or not, but for us for the Fed to do nothing is not really an option.
The value of active minds: independent thinking
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