Inflation is on the rise, from above its 2% inflation target for the first time in many years, and global interest rates are still at historically ultra-low levels to allow for a broad-based recovery from the pandemic. This current scenario is making central bank economists nervous and producers stress over price rises, material shortages and delivery bottlenecks.
Witness the global shortfall and bottlenecks in the manufacture and supply of critical semi-conductors for the automotive industry. It is shutting down production lines at factories, for example, in Slovakia for JLR’s new Defender model with a backlog of many months for customer orders.
The building trade is another sector with material and labour shortages in the UK and across the EU. Timber prices have only recently fallen from yearly highs in the US, where it is extensively used in US housebuilding, where demand has caused a 11.6% price rise in the last year (Zillow, 2021). In the UK house prices have risen 10.58% in the last year, along with strong demand for home improvements, have driven those labour and material shortages along with prices (Zoopla, 2021). Higher post-pandemic savings and less opportunity to spend money on travel being underlying reasons for the higher demand for the building trade activity.
Therefore, how long can the central bankers stay their hand before lifting rates which would hit borrowers, sectors and individuals hardest hit by the pandemic to temper demand in housing and rising input costs for manufacturers? The UK economy shrank in Q1 of 2021 not unexpectantly however by the mid-year a more robust recovery seems to be materialising yet rental arrears in commercial properties especially retail remain slow and problematic. The changes to shopping habits on the high street along with the WFH ethos will have a long-term bearing on the development and utilisation of commercial property across the country.
Many argue that financial markets have risen enough to discount much of the recovery so far thus an interest rate adjustment for rising inflation pressures will become increasingly necessary as the recovery progresses. As Warren Buffet likes to say about asking a barber about a haircut- how long can central bankers resist raising rates and allow a price driven recovery to go untampered?
Are markets heading for another bond led taper tantrum in 2021 or is a bit of asset re-positioning all that is required from a well-prepared asset manager-again time will tell if the right choices are being made.
LDC
References:
Zillow, (2021) ‘ United Sates Home Values’, 2021 Zillow Inc, [Online] Available at: United States Home Prices & Home Values | Zillow
Zoopla, (2021), ‘House prices in the UK’, 2021 Zoopla Ltd, [Online] Available at: House prices in UK stand at £341,117 on average – Zoopla