It is a truism that if you ask this question of half a dozen economists, you will receive a dozen answers. Here I backtrack to what has originally inflamed inflation. Perversely, this may be just what the markets are looking for. They may, though, give economic growth a nasty jolt. These will, of course, over coming months have absolutely no impact on inflation whatsoever. And on the basis that Central Banks currently kowtow to politicians and markets alike, higher interest rates are what we are getting. This would be the same mob that bayed for more and more quantitative easing. The cry of the mob is now for higher interest rates. What we are seeing, in gardening terms, are the leaves, the fruits and the flowers of plants sowed long ago. The root of double-digit inflation is not what has happened over the past three or four months. I am not quite sure how this has happened, but that blatant truism appears to have been completely forgotten. To borrow a phrase from Billy Joel, ‘when I wore a younger man’s clothes’ we were taught, correctly, that inflation was what economists called a lag-indicator. Now that we have established that the world is not equal, we can move onto what might happen in the West over the next twelve or so months.
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It is prone to some quite sharp monthly wobbles, but it is fair generalisation to say that China runs with an inflation rate of around 2%, while the West is currently trying to work out how to deal with 10%. That quarterly performance is roughly 20% better than the MSCI USA Index.Ĭhina’s official annual inflation rate is currently 2.1%. The MSCI China Index has risen more than 10% over the past month and is currently up an approximate 5% over the past three months. The news coverage, which is sensationalist by definition, has been about Covid lockdowns, President Xi’s ego and much slower economic growth. You could be forgiven for not having spotted that the standout equity markets over the past quarter have been in China. Nonetheless, there are enough straws in the wind to suggest better times ahead for the patient. There is a caveat to this, which we shall come on to, but the combination of extraordinarily high inflation and the start of a monetary tightening cycle has been painful for almost everyone. Despite last week’s arguably overdue bounce in the US equity markets, it has been a miserable three months for investors.
It is time to take stock of things as we head towards the end of the second quarter of the year.
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