Are inflationary pressures broadening worldwide?

by BeiChen Lin, Russell Investments

On the latest edition of Market Week in Review, Investment Strategy Analyst BeiChen Lin and Senior Client Investment Analyst Chris Kyle discussed recent inflation numbers from around the globe and the market reaction to the rise in consumer prices. They also reviewed the latest developments surrounding the proposed U.S. social-spending and climate bill as well as the U.S. debt-ceiling deadline.

U.S. October prices climb 6.2% as inflation spreads

On Nov. 10, the U.S. Labor Department reported that its consumer price index (CPI) rose by 6.2% during October on a year-over-year basis—an uptick from the lofty gains seen over the spring and summer and the highest reading since the early 1990s, Lin noted. “This rise in prices is not just an American phenomenon,” he stated, explaining that in China, factory inflation during October rose to a 26-year high, while price increases in Canada and the eurozone have also topped records recently.

In addition to the overall uptick in inflation, another global trend has emerged over the last few months, Lin said: a broadening of price pressures to other sectors of the economy. “Earlier in the year, inflation was mostly concentrated in sectors like aviation and travel, largely due to the rebound in consumer demand after COVID-19 restrictions were eased in the spring. Now, price increases are starting to spread out into sectors like food, energy, shelter and automobiles—and that’s grabbing the attention of consumers and investors alike,” he stated.

October inflation report jolts U.S. markets

Markets reacted strongly to the U.S. October inflation numbers, Lin noted, with the benchmark S&P 500® Index slumping 0.8% on Nov. 10 in the wake of the CPI report. The yield on the 10-year U.S. Treasury note also spiked by 12 basis points as government bond prices fell, he added. By Nov. 12, equity markets had clawed back some of their losses, but Treasury yields remained elevated compared to the prior week, Lin noted. Meanwhile, prices for gold and Bitcoin also increased, he said.

“All told, this reaction suggests that while U.S. economic fundamentals are still strong, investors are becoming increasingly worried about inflation—and are consequently adapting their positions to try to capture some excess return by investing in market sectors that might benefit if inflation continues to remain elevated,” Lin stated. In his opinion, the main causes of inflation remain temporary bottlenecks, snarled supply chains and labor-force participation issues, all of which he believes are likely to alleviate more in the year ahead.

That said, Lin emphasized that whether or not inflationary pressures continue to spread throughout the broader economy remains a key market concern, in addition to how central banks could react to the latest numbers. A particularly important watchpoint for investors is the next U.S. Federal Reserve meeting in mid-December, he said, where markets will be looking for clues from Chair Jerome Powell on when rate hikes may begin.

Debate over U.S. spending bill continues, debt-ceiling deadline approaches

Turning to the latest political developments in Washington, D.C., Lin noted that the U.S. House of Representatives passed the Senate-approved $1.2 trillion infrastructure bill on Nov. 5, clearing the way for President Joe Biden to sign the measure into law. While six House Democrats voted against the bill, the defection was offset by 13 Republicans, who joined forces with a majority of Democrats to approve the legislation, he said. The passage of the bill will hopefully help to alleviate some of the nation’s supply-chain bottlenecks and inflationary pressures, Lin added.

Meanwhile, debate continues in the nation’s capital over the approximately $1.75 trillion social-spending and climate bill, otherwise known as the Build Back Better plan, he said. “This measure, which is a centerpiece of Biden’s economic agenda, has been trimmed down in size over the past few months, but some centrist Democrats, such as Senator Joe Manchin of West Virginia, continue to express concerns about the overall price tag,” Lin stated. Even some moderate House Democrats have also recently stated that they want to see how the Congressional Budget Office scores the bill before agreeing to vote on it, he added.

Last but not least, Lin noted that the debt-ceiling deal struck between U.S. lawmakers last month expires on Dec. 3, meaning that the U.S. will need to raise the federal borrowing limit by then or risk defaulting on its debt. “The clock is ticking on this, as early December is only a few weeks away and Senator Mitch McConnell has made it clear that the Republican Party doesn’t want to help the Democrats increase the debt ceiling this time around,” he stated. However, Lin believes it’s possible that either McConnell or Senate Democrats could compromise as the deadline nears.

“At the end of the day, I don’t think any member of Congress—Democrat or Republican—wants to see the U.S. default, and I believe this situation will ultimately be resolved,” he stated, noting that there’s potential for increased market volatility as Dec. 3 approaches.