LONDON: The US should be braced for two years of higher inflation as a result of the pandemic, says Invesco, but believes the Gulf region will not face the same upward pressure on the prices of everyday goods.
America’s Labor Department reported that its consumer price index lifted to 5.4% in July from a year earlier, as pent-up demand for travel and restaurants pushed up prices after the easing of lockdown restrictions.
This inflation rate matched the largest jump the US economy had seen since August 2008.
Invesco chief economist John Greenwood disagrees with the US Federal Reserve’s view that this high rate is a “transitory” effect of the opening up of the American economy.
He warns that investors, particularly bond investors, should be wary of maintaining exposure to assets that are vulnerable to inflation at a time when rising prices are likely to erode returns for at least the next two years.
Greenwood said: “Central bankers are following an upside-down theory of inflation when they explain the current episode of inflation as a transitory, bottom-up, accidental process delivered by temporary, idiosyncratic or segmented price increases which will soon be reversed.”
He added: “Inflation is a top-down process – money driving individual prices higher in a somewhat random, chaotic order determined by which goods and services happen to be in short supply. However, the overall process is one in which excess money eventually pushes all prices higher.”
The economist said the M2 money supply in the US has jumped by 32 percent since last February, which has led to a large build-up of cash inside the biggest economy in the world.
During this time the Fed has increased quantitative easing, while the US government put millions of US workers on furlough to support the economy through the health crisis.
By contrast, Invesco said the Gulf region should escape this price pressure as “the excess money growth that has produced the current episode of inflation in the US is not present”.
The US investment house said: “Money growth rates in the UAE remain very subdued, and only slightly less so in Saudi Arabia. As a result, Invesco’s chief economist believes that neither area is likely to experience the kind of inflation currently breaking out in the US.”
In Saudi Arabia, the consumer price index rose in July by 0.4 percent compared to the same month a year ago, but this increase is a sharp drop from the annual rate recorded in June of 6.2 percent, data from the Kingdom’s General Authority for Statistics showed.
The sharp fall in annual inflation reflected the diminishing impact of the increase in VAT from 5 percent to 15 percent that significantly affected the consumer price index levels starting from July 2020, the authority said.
In the UAE, the price of goods fell by an average of 0.3 per cent in the first six months of this year, said the Gulf country’s central bank said in its June economic quarterly review.
The central bank attributed the fall to lower real estate prices and private consumption, which still recovering from the pandemic, and the decrease in oil prices.
Greenwood said the Fed is in danger of repeating mistakes that led to the Great Inflation of the 1970s, where the value of goods rose following a hike in oil prices.
At that time policymakers argued the rise in inflation caused by higher oil prices was temporary, however, the prices of cocoa, sugar, wheat and other goods also rose, leading to a long bout of inflation.
The economist said that in this current round of rising US inflation family homes, cars, international shipping rates and electronic chips are in short supply and have seen their prices jump.