Deutsche Bank believes that considering the global increase in money supply growth, sticky inflation, geopolitical risks, and the need for greater fiscal stimulus for higher post-pandemic real yields, it is still too early to dismiss inflation risks.
As the US inflation steadily approaches the target of 2% this year, the risk in the labor market seems to be the only obstacle to the Fed's rate cut. Currently, the market is focused on the Fed's FOMC meeting in September, and believes that the non-farm payroll data released on Friday will be an important window for predicting the magnitude of the rate cut.
Henry Allen, an analyst at Deutsche Bank, recently published a research report stating that although there has been significant progress in combating inflation in the past two to three years, with US PCE inflation and Eurozone CPI inflation returning to the '2% range,' it is still too early to rule out inflation risks.
The report identifies four main reasons for this.
First, as major central banks around the world gradually enter a loose monetary policy cycle, the growth rate of money supply is rising again, pushing up price risks. Data shows that the real yield on 10-year US Treasuries has fallen by more than 50 basis points since its peak in late April.
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Second, there are still upward risks in inflation sub-items with higher stickiness.
The report cites an example that the Atlanta Fed's inflation indicator divides inflation into two categories: elastic inflation sub-items and sticky inflation sub-items. The former have relatively fixed prices and high stickiness, while the latter have frequent price changes and are relatively more flexible. Whether from a 3-month or 12-month perspective, sticky inflation sub-items are the main factors driving overall inflation higher, while flexible inflation sub-items may even be in deflationary territory.
The same is true in the Eurozone. The latest CPI data shows that the year-on-year growth rate of commodity CPI in the Eurozone in August was only 1.4%, while the growth rate of service CPI rose to 4.2%, the highest level since October last year.
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Thirdly, geopolitical impacts could push up commodity prices.
In recent years, geopolitical conflicts around the world have frequently pushed up energy and shipping prices.
The report states:
We have recently seen a lot of experience on how geopolitical events can trigger supply shocks and drive up inflation without warning. Given the many risks present in the current geopolitical landscape, this price upside risk is worth noting.
Finally, the report suggests that global real yields have risen due to the impact of the pandemic, and government deficits and fiscal stimulus costs have also risen accordingly.
In other words, monetary policy may need to provide more economic stimulus than in the past to mitigate potential growth shocks in the future, which could more directly push up inflation.
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