Welcome once again to our quarterly review of inflation in the Mintos Insight series. Building on the groundwork from our first edition published in May, the inflation monitor continues to shed light on inflationary trends. We take a look at key global economies, revealing underlying patterns, and offering valuable insights into future economic landscapes.
Inflationary pressures within the Eurozone appear to be easing, as evidenced by recent Eurostat data. Consumer Price Index (CPI) figures for July reflected a 5.3% increase, a marginal deceleration from the 5.5% rate recorded in June. This marks a downward trend that began in October 2022.
Excluding volatile components such as food and energy – often referred to as “core inflation” – the rate remained steady at 5.5%. Notably, the inflation rate for services (a category largely sensitive to wage fluctuations), experienced an uptick to 5.6%, up from 5.4% in the preceding month. As wages increase, the prices of services tend to rise as well, since labor is a significant cost for many service providers.
The European Central Bank (ECB) has been proactive in its response to this historic inflation spike, increasing interest rates at an unprecedented rate over the past year. The ECB aims to recalibrate price growth towards its 2% benchmark.1,2
Broader economic indicators
The Eurozone’s economic growth appears to have plateaued, with GDP growth of 0.3% in the second quarter of 2023 compared to the previous quarter. This slowdown is mirrored by signs of weakened investments, as evidenced by the 0.2% increase in employment during the same period, indicating cautious business expansion.3
One potentially positive development is the drop in energy prices, which historically has been a major driver of inflation. This decrease in energy costs holds promise for future consumer costs, potentially alleviating some inflationary pressures. However, it’s important to note that the benefits of lower energy prices might manifest gradually over time.4
Labor and wage dynamics
Wage dynamics, especially in major economies like Germany, are at the forefront of the Eurozone’s inflationary trajectory. The recent 5.5% pay hike for public sector workers in Germany might set a trend for wage negotiations across the continent.5
The ECB anticipates the Eurozone’s wage growth to average around 5.3% in 2023, with a tapering expected in the following years. Alongside these forecasts, heightened competition in the labor market empowers workers to negotiate elevated wages, feeding into the inflationary pressures. In the current environment, achieving an inflation rate even close to 3% poses a considerable challenge.6
The United States
The beginning of 2023 showed substantial inflationary pressures, with April posting a monthly rate of 5% — which, at the time, was considered to be the lowest since 2021.
The numbers continued to decline from April in consecutive months, with a showing of 3% in June. However, in July, there was a modest uptick to 3.2% from June’s 3%. The overarching trend finally hints at a decelerating inflationary environment. This is particularly noteworthy since it marks the end of a year-long period of consistent inflation rise.7
Source: Trading Economics
The Fed’s response
At the start of the year, the Fed responded by increasing rates, peaking between 4.75% and 5% in an effort to counter inflation. As we navigate through August, the US inflation rate has settled at 3.2%. Moreover, the key interest rate has climbed to 5.25% after a series of 11 rate hikes since 2022.
In his address at the Jackson Hole symposium, Jerome Powell, Chairman of The Fed, alluded to the potential for additional rate hikes “if deemed necessary.” External pressures, such as the Russia-Ukraine conflict and fluctuating food and energy prices, have been identified as catalysts for inflation. The resilient housing market and persistent wage growth, set against the backdrop of a diminishing workforce, suggest that these inflationary tendencies may continue. These dynamics spotlight the Herculean task ahead for the Fed to reach its 2% inflation target.8
In July 2023, the UK experienced a notable deceleration in its inflation rate, with the CPI rising by 6.8%. This marked a significant decline from earlier months in the year, notably February’s peak of 10.4%. While the current rate remains higher than those observed in other major economies, several key factors contributed to this moderation in inflation.9
The culprit: Food price surge
A standout driver of the heightened inflation witnessed in the UK during the first half of the year was the sharp escalation in food prices. By March, food prices had surged by an astonishing 19.2%, reaching levels not seen in over 45 years. This surge placed substantial pressure on overall inflation and significantly impacted consumers’ purchasing power. While the rate of food price growth has slowed since its peak, it remains a pivotal factor in the ongoing inflation narrative.10
Source: Bank of England, Office for National Statistics
According to projections from the Bank of England, there is optimism for a gradual decline in inflation as the year progresses. The central bank anticipates that by the close of 2023, the inflation rate will recede to around 5%. Looking ahead to early 2025, the Bank of England’s forecast aligns with its longstanding 2% inflation target. This projected decrease is expected to be influenced by a reduction in gas prices, which, in turn, is anticipated to lead to lowered household energy bills.11
For the second month running, Japan’s core consumer inflation has dipped, yet it continues to surpass the 2% target set by the Bank of Japan (BOJ). This marks 15 consecutive months of inflation in Japan, the world’s third-largest economy.12
Source: Trading Economics
Due to a global surge in commodity prices last year, Japanese companies are passing on higher costs to consumers. When the cost of materials (like metals or grains) goes up globally, it leads companies to increase product prices to maintain their profit margins.
This prolonged inflationary phase prompted the BOJ to tweak its bond yield control policy, hinting at a shift from its long-term ultra-loose monetary policy. By adjusting this policy, the BOJ is signaling that it’s closely monitoring the inflation trend and might consider further measures to rein it in.13
In a surprising economic turn, while much of the world grapples with inflationary pressures, China has been facing deflation, posting a rate of -0.3% in July 2023. This points to restrained spending habits among its consumers and businesses.
Source: Trading Economics
Such a trend, if sustained, could signal worrying consequences for the Chinese economy. Deflation often results in a vicious cycle where consumers delay purchases in anticipation of further price drops, causing businesses to curtail production, thereby leading to increased unemployment. This can further strain the debt obligations of both businesses and individuals, escalating the risk of defaults and a potential financial crisis.
Despite efforts by the People’s Bank of China (PBOC) to combat this economic slowdown – measures that included interest rate cuts and injecting liquidity into the banking system – the anticipated resurgence in spending remains elusive. The inefficacy of these measures presents a conundrum for policymakers, who are now tasked with devising new strategies to stimulate economic activity and mitigate the deflationary trend.14
Key takeaways for investors on Mintos
- Understand the global landscape
Inflation and deflationary trends vary significantly across major economies. Knowledge of these trends can inform which regions might offer more stable investment opportunities.
- Stay agile in the face of deflation
While much of the discussion is centered around inflation, China’s deflationary scenario serves as a reminder that markets can swing both ways. Ensure your portfolio is robust enough to withstand both scenarios, emphasizing the importance of diversification.
- Focus on wage growth dynamics
With wage growth playing a significant role, especially in the Eurozone, it’s vital to understand its impact on broader inflation trends. By watching wage dynamics, investors can better anticipate sectors or regions that may see price adjustments.
- Be mindful of external factors
Events like geopolitical tensions can indirectly influence inflation rates. Monitoring these global situations will ensure you’re not caught off-guard by sudden market shifts.
- Harness opportunities in volatile sectors
Sectors like energy and food can see rapid price fluctuations, impacting inflation rates. While they can be risky, they also present opportunities for well-informed investors.
Mintos Activity: August 2023
The month of August has shown promising growth on Mintos. Total investments saw a significant increase of €99.5 million worth of Notes funded, and interest earned by investors climbed to €4.3 million.
The average interest rate for August stood at 12.4%, translating to an annualized average net return of 10.3% (YTD 6.8%). The cumulative interest earned by investors on Mintos has now reached €246.5 million, and the total assets under administration are now €594.1 million.
This is a marketing communication and in no way should be viewed as investment research, advice, or recommendation to invest. There is no guarantee to get back the invested amount. Past performance of financial instruments does not guarantee future returns. Investing in financial instruments involves risk; before investing, consider your knowledge, experience, financial situation, and investment objectives.
1 Annual inflation down to 5.3% in the euro area. (2023, August 18). Eurostat. https://ec.europa.eu/eurostat/en/web/products-euro-indicators/w/2-18082023-AP#:~:text=The%20euro%20area%20annual%20inflation,down%20from%206.4%25%20in%20June.
2 Two per cent inflation target. (2021, November 10). European Central Bank. https://www.ecb.europa.eu/mopo/strategy/pricestab/html/index.en.html
3GDP and employment flash estimates for the second quarter of 2023. (2023, August 16). Eurostat. https://ec.europa.eu/eurostat/documents/2995521/17337861/2-16082023-AP-EN.pdf/927cb6f7-c2fa-0e5e-abcd-ceeb40ebed41
4 Industrial producer prices down by 0.4% in both the . (2023, August 3). https://ec.europa.eu/eurostat/documents/2995521/17271894/4-03082023-AP-EN.pdf/cf834d7b-1d6a-a151-d234-bad1050b23b6
5 Collective agreements. (n.d.). Federal Statistical Office. https://www.destatis.de/EN/Themes/Labour/Earnings/Agreed-Earnings-Collective-Bargaining-Coverage/Tables/collective-agreements.html
6 Eurosystem staff macroeconomic projections for the euro area, June 2023. (2023, June 15). European Central Bank. https://doi.org/10.2866/960
7 Consumer Price Index Summary – 2023 M07 Results. (2023, August 10). U.S. Bureau of Labor Statistics. https://www.bls.gov/news.release/cpi.nr0.htm
8 Speech by Chair Powell on the economic outlook. (n.d.). Board of Governors of the Federal Reserve System. https://www.federalreserve.gov/newsevents/speech/powell20230825a.htm
9 Beckett, D. (2023, August 15). Consumer price inflation, UK – Office for National Statistics. www.ons.gov.uk. https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/july2023
11 When will inflation in the UK come down? (n.d.). Bank of England. https://www.bankofengland.co.uk/explainers/will-inflation-in-the-uk-keep-rising
12 Price Stability Target of 2 Percent and Quantitative and Qualitative Monetary Easing with Yield Curve Control : 日本銀行 Bank of Japan. (n.d.). Bank of Japan. https://www.boj.or.jp/en/mopo/outline/qqe.htm
13 Statement on Monetary Policy. (2023, July 28). Bank of Japan. https://www.boj.or.jp/en/mopo/mpmdeci/mpr_2023/k230728a.pdf
14 Hoskins, B. P. (2023, August 21). China cuts key interest rate as recovery falters. BBC News. https://www.bbc.com/news/business-66567085