Are we too complacent about inflation?

The Fed will likely raise rates to normalise as the stimulus is spent or saved, and the global supply situation eases, thus also easing up on inflation, said Etiqa Insurance and Takaful chief market strategist Chris Eng. More pressure: A file picture showing freshly-printed US$20 notes. The debate is whether the United States can avoid hyperinflation if it prints its way out of the stupor caused by Covid-19. — AFP

AS markets pencil in higher inflation, there is overall a lack of urgency regarding this danger.

No doubt this round, the US Federal Reserve may tolerate a slightly higher inflation rate than 2%, before acting to raise interest rates, but timing may be an issue.

If they act too late, inflation could get out of hand and require more drastic measures that will hurt a lot of people and damage economies.

The US inflation is expected to jump to 2.4% this year, above its target of 2%, but that is viewed as a temporary spike and will not change the Fed’s policy of keeping rates low to help the economy heal.

But opinions among the Fed’s 18 policymakers already showed a shift, with four expecting rates to rise next year, and seven seeing an increase in 2023.

The tolerated inflation target may hit 3%, as some higher-than-acceptable inflation may persuade Americans to spend now rather save.

Already, the level of US savings has spiked as those who had previously received stimulus cheques had not spent all that they got.

The US savings rate had risen from 7.2% in December 2019 to 33.7% in April 2020, and remained at 13.6% in October 2020, higher than its peak in any recent recession, said Kansas City Fed in a an economic bulletin.

“With trillions of dollars in stimulus after stimulus, the danger of inflation may suddenly loom into view, ’’ said Inter-Pacific Securities former head of research Pong Teng Siew.

A US$2.2 trillion (RM9 trillion) stimulus package under the CARES Act was signed In March 2020; by the end of 2020, a US$2.3 trillion spending bill was passed; by March this year, an additional US$1.9 trillion package under the American Rescue Plan had gone into effect.

The spike in oil prices may be similar to what happened in the 1970s; during the 1973 Arab-Israeli war, oil price rose from US$3 to US$12 per barrel by 1974.

Oil price of US$100 per barrel, in the next six to 12 months, is being cited by Piper Sandler’s senior technical research analyst, Craig Johnson, during CNBC’s “Trading Nation.”

The Fed is risking everything on this spike in oil prices being transitory, but it may well turn out not to be so, said Pong.

The pattern is remarkably similar to that of the 1970s, except that rates are now near zero, making fears more real and rapidly driving up 10-year US bond yields over the past two months.

As in Weimar Germany, centre of the hyperinflation horror story of 1923, could the inflation shock this time emerge in less than a decade?

Against high levels of inflation, the German government then had printed more money to pay striking workers; as more money was printed, prices kept skyrocketing, causing hyperinflation.

Weimar printed its way into hyperinflation; can the United States avoid that if it printed its way out of the stupor caused by Covid-19?

The current fear is that when inflation actually runs out of control, will there be another Paul Volcker, then Fed chair from 1979 to 1987, to bring it under control?

Volcker had raised rates from 11% to 20% by the late 1980s to rein in runaway inflation.

The general view is that over the next few months, there will likely be an inflationary spike and temporary overheating of the economy.This is as demand surges without the ramp-up in supply due to fears of poor investment policies in the United States, and Covid-19 related constraints on global trade.

But many are calm over the effects of this temporary spike in inflation.

The Fed will likely raise rates to normalise as the stimulus is spent or saved, and the global supply situation eases, thus also easing up on inflation, said Etiqa Insurance and Takaful chief market strategist Chris Eng.

Currently, there is no urgency to raise rates.

Recent strong economic data was measured against a low base last year.

Meanwhile, current inflationary pressures are largely a result of temporary supply disruptions rather than consumption or investment, both of which would be most affected by any raising of rates, said Fortress Capital CEO Thomas Yong.

“In the near term, increase in demand is positive for port activities; the numbers in March for our ports are all showing up, ’’ said MMC group managing director Datuk Seri Che Khalib Mohamad Noh.

Serba Dinamik does not see any impact from current inflation fears on its business.

“We have factored in the worst case scenario into our sustainable business plan, ’’ said Serba Dinamik CEO Datuk Karim Abdullah.

The cost of materials including oil price, is creeping up, and may hit the margins of some small and medium scale enterprises which are currently not able to pass the costs through.

Depending on the price elasticity of demand, there could be some gradual adjustment of the pricing of finished goods, said Small and Medium Enterprise Association national secretary Yeoh Seng Hooi.

The retail sector is not yet affected by inflation concerns; the hike in prices of some basic necessities is just temporary and consumers can buy cheaper alternatives, said Retail Group Malaysia managing director Tan Hai Hsin.

Generally, inflation has not hit the scene in a big way but watch out in case things get out of hand.

Yap Leng Kuen is a former business editor of StarBiz.The views expressed here are the writer’s own.

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