COVID | Monetary Policy & Inflation
Charts of the Week: Inflation Will Get Worse
- By Matthew Tibble
- 2 min read
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Summary
- UK inflation is about to get worse.
- So is US inflation.
- Also, technically, the US is in a recession.
- And hedge fund net shorts are larger than during the Covid crash.
UK Inflation Is About to Get Worse
Since May, BoE speakers have warned that peak inflation forecasts would need to be revised higher, but the scale of that rise could be even greater than they had thought. Ofgem’s CEO guided that a 42% rise in the energy price cap would be needed in October based on price data seen in late May. Since then, the price has more than doubled (Chart 1).
So Is US Inflation
Core inflation is sliding because the decline in core goods inflation is offsetting the acceleration in services inflation (Chart 2). But with a very tight labour market and residual supply bottlenecks, it is only a matter of time before the reverse becomes true (End-22 PCE to Exceed Fed Forecast). Therefore, Dominique expects the Fed to hike another 175bp by end year and the curve to invert further.
The US Is in a Technical Recession
The advance estimate of Q2 GDP was -0.9% qoq saar, against 0.4% expected and -1.6% in Q1. The US is in a technical recession.
The miss reflected weaknesses across all categories of spending (Chart 3). Nevertheless, the release is broadly consistent with Dominique’s view that US growth is hitting an air pocket rather than crashing, and she expects growth to return to positive in H2.
Hedge Funds Short the S&P 500
Unconvinced by July’s rally, hedge funds are shorting the S&P 500 in greater amounts than even during the Covid crash (Chart 4). Real money also prefer to be net underweight the S&P 500. We explore more in our positioning report.