How long central banks can keep rates low depends on whether there will be a spike in inflation.
Both the Fed and the BOE have committed to keeping rates low for an extended period of time. And, there is speculation they might cut rates again.
However, if inflation starts to tick up, that might be put on hold – even if the economic situation is worsening.
Something forgotten since February is coming back to be a concern. That is supply chain disruptions.
With changing border control policies around the world, and economic activity fluctuating, shipping companies are having trouble keeping up with demand. This is especially true for major raw material shipments that need planning for months in advance.
Logistics is the Backbone of Capitalism
Passenger airlines represent a sizable portion of cargo shipments, with up to 40% of air cargo being transported in scheduled passenger flights.
This offers a significant amount of versatility in shipping, allowing for logistics companies to “cover” supply issues with fast, reliable shipping.
With passenger frequencies severely reduced, or non-existent, and less frequent cargo planes coming to the fore, logistics companies are having trouble filling shipping orders.
The end result is that some companies are having difficulty obtaining supplies, while other companies have excess production.
On the one hand, some products are spiking in price, while others are being discounted. Increased shipping costs are compressing margins for many businesses. This might force them to raise prices, or lead to bankruptcy. So how does this average out for inflation?
What We Are Looking For
First up, we have the US.
The Fed, and therefore the market, pays attention to the Core CPI figure. Projections indicate that it will continue its decline at -0.3%, compared to -0.1% in the prior month.
This would likely support the view that the pandemic would push major economies into deflation, and give space for continued easing by central banks.
On an annualized basis, this would imply core CPI at 1.0% compared to 1.2% prior, at half the Fed’s target rate.
Under normal circumstances, this would all but guarantee a rate cut. But, the Fed is still way more interested in the jobs market.
The UK puts out a host of economic data just before the markets open on Wednesday, but inflation is likely to be the major event.
CPIH isn’t as important now that the UK is on the way out of the EU, so we’d want to focus on the Core CPI.
Inflation in the UK is projected to remain rather stable, with monthly change in core CPI projected at -0.1% compared to 0.0% prior. This comes out to a yearly change in CPI of 1.3%, actually an increase over the 1.2% prior.