Wednesday 09 February 2022 by FIIG Research Credit-Outlook-Inflation-Image General

2022 Credit Outlook - Inflation

After years of undershooting of inflation targets, particularly in developed markets, headline inflation is surging after years of dormancy. A number of countries are now experiencing headline inflation rates at multi-decade highs.

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Globally, inflation appears set to continue its climb higher in the near-term, as factors driving inflation have recently proven more persistent than initially expected. Many are due to problems in global supply chains, and those price rises should eventually reverse, particularly as demand shifts from the consumption of goods to services as local economies re-emerge from various lockdowns, but they could take longer to subside as is the general consensus. The re-emergence of COVID-19 outbreaks as well as new variants run the risk of extending some supply constraints as well as creating new ones.

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Much attention has centred on the formation of supply bottlenecks in response to persistently strong demand for consumer goods. However, growth in headline inflation has also become increasingly broad-based, including food, energy, and shelter costs. Fiscal and monetary policies have undoubtedly contributed to higher levels of inflation, by design and somewhat by desire. Market-based inflation expectations have risen, but mostly for shorter time horizons. The prospect of tighter monetary policy in the near term appears to have reduced expectations for growth and inflation down the road.

In Australia, we believe inflation will be more subdued relative to global peers. While wage growth should improve as employment creation strengthens on the back of very high vaccination rates, a gradual re-opening of international borders to resolve areas of heightened demand for labour should act to alleviate upward pressure on wages.

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We believe other factors that have strengthened headline inflation in the Northern Hemisphere - particularly energy prices and rents - are likely to be less pronounced locally.

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To read more about our inflation outlook for 2022, you can download the full report here.