Max Pacella
Investment Analyst
Macro & Markets
30 Nov, 2021

The topic of inflation has been a hotbed for debate since the global effort to lift the economy out of a pandemic-assisted slump began – though arguably the past six months has been the point of maximum exposure.

As a macro phenomenon which is largely driven by psychology, the shift in popular discourse from “completely transitory” and under control to “more persistent than expected” is important to take note of.

To get a sense of how the narrative (and economic variables) have shifted, we will compare the comments made by Fed Chair Jerome Powell at Jackson Hole – covered by Jesse back in August – and statements made by our own RBA Governor Philip Lowe in the same period, against more recent comments made by both central bankers.

August 2021 – “Team Transitory”

Forewarning, I’m not going to include a dozen charts in this section showing the different indicators the Fed and RBA used to justify their conclusions in August.

The examination point of this note is the narrative around inflation, the central banks have the oratory power of “inflation will do as I say not do as the data tells it to do”, so their rhetoric around inflation is arguably as (if not more) important than any chart.

If you read the “Statement on Monetary Policy – August 2021” from the RBA, the very first line reads: “underlying price and wage pressures in the economy remains subdued”.

This mirrors comments made by Jerome Powell (emphasis mine), “[Concern about high inflation] is likely to be tempered by a number of factors that suggest that these elevated readings are likely to prove temporary”.

At the time both central banks were not in denial of rising headline inflation, however, they attributed this rise to one-off effects which were largely regarded to be transitory and likely to ease off in the short-to-medium term.

An example close to home was the RBA noting that headline inflation was spiking “as government subsidies for some services were removed”, considering this removal of fiscal support for services like childcare to be a one-off shock to household balance sheets.

In the US, Fed Chair Powell delivered a keynote speech at Jackson Hole which continued his dovish stance and expectations that inflation would be a transitory, restrained force in the economy.

For example, he called out data on used car prices which appeared to have stabilised, as well as absence of aggressive wage growth which might “threaten excessive inflation”. The preferred data point for wage growth levels is the Atlanta Fed Wage Growth Tracker, which can be seen below as of 1 August 2021 levels:

Source: Mason Stevens, Federal Reserve Bank of Atlanta

Though there is a strong increase from May readings, the levels reached in August were not unreasonable given the historical levels going back to late 2016.

As recently as August, two of the most relevant central banks to us as Australian readers/investors were very much for the narrative that headline inflation was driven by temporary, one-off factors which would cease in the medium-term.

Let’s see how that sentiment has changed recently.

November 2021 – “More Persistent than Expected”

To demonstrate the parabolic increase in attention from “main street” paid to inflation, let’s break out our friend Google Trends.

Source: Mason Stevens, Google Trends

In August those levels were around on par for the 5-year average, after a brief spike in Q2 2021.

However, since then, rising prices have pervaded the popular psyche – the psychology of inflation has broken free from “team transitory” and has now become an issue that everyday people (in the chart above, everyday Americans) concern themselves with.

That shift is also evident in the rhetoric of our central bankers.

Contrast the RBA three months ago [reminder: “underlying price and wage pressures in the economy remains subdued”] to the first line of the November 2021 update: “Inflation was stronger than expected in the September quarter”.

Even the considerations to the previously labelled “one-off” effect of government policy withdrawal for childcare was framed in a new light, “while the peak effect of earlier government policies has passed, their unwinding is still boosting year-ended inflation”.

Whilst there are not necessarily major changes in the actual economic data, they are significant changes in the way that data is presented and framed by our leading monetary authority.

In the US, the framing of inflation has also leant towards a “more persistent” tone, which has the dual purpose of showing the Fed sees the issues affecting “the common man” and leaving themselves options to enact more hawkish monetary policy without contradicting themselves.

A quote from Jerome Powell at the most recent FOMC meeting, “… need to keep all options open as inflation has remained more persistent than expected” demonstrates how the narrative has changed from disregard to cautious.

To briefly return to the Jackson Hole comment around wage growth, here’s that same chart from the Atlanta Fed, updated to the November 2021 numbers:

Source: Mason Stevens, Federal Reserve Bank of Atlanta

Recall that in the United States, the mid-term elections will be held in November 2022, following a round of gubernatorial elections which were held earlier this month.

One reason why the messaging around inflation may have changed is that if it is not transitory, or at the very least remains elevated up until next November, voters may look at how the decisions of the Federal Reserve (and by extension, the government) have hurt their bottom line and choose to vote with their wallets.

Perhaps this signals that central banks will need to address current economic variables more aggressively, or at least directly, than they have in the past 18 months (preferring to lean on forward guidance and looking beyond the short-term effects of policy effects).

One thing is clear: the narrative around inflation has changed, and we may now see the actions taken to address inflation change in due course.


Rocking Prices

The recent attention gathered by COVID’s Omicron variant is particularly relevant to a note such as this.

Will central banks take the emergence of a new strain to walk back this recent change and look to re-double efforts to support the economy? Will the new strain impact re-opening efforts and shift public attention away from inflation?

These are the type of questions which make capital markets so dynamic and exciting, albeit nerve-wracking at times.

All things being equal, there has been a definite shift in the acknowledgement that inflation is becoming a problem and that the problems causing it are not exiting the global stage quickly.

The views expressed in this article are the views of the stated author as at the date published and are subject to change based on markets and other conditions. Past performance is not a reliable indicator of future performance. Mason Stevens is only providing general advice in providing this information. You should consider this information, along with all your other investments and strategies when assessing the appropriateness of the information to your individual circumstances. Mason Stevens and its associates and their respective directors and other staff each declare that they may hold interests in securities and/or earn fees or other benefits from transactions arising as a result of information contained in this article.