Reflation is not stagflation in the Eurozone; Money supply, saving & hoarding – what you see is not what you get; LatAm country risk updates

Perfection is not attainable, but if we chase perfection we can catch excellence. Supporting documentation for this quote from Vince Lombardi with our latest on the ‘hot potato’, inflation dynamics, the uncertainty about the pace of the post-Covid recovery and how the ECB credibility is being tested. Another consequence of the pandemic is excess savings; yet, there’s a fundamental difference between proper saving aka not consuming, or hoarding, not spending at all. Our second publication looks into the theoretical framework and provides an outlook on the repercussions of cash hoarding. Furthermore, we have the second batch of updated LatAm risk reports for you.

Eurozone: Reflation is not stagflation

The scale and duration of surging inflation continues to be high on the agenda of central bankers and investors as uncertainty about the pace of the recovery remains high.

• We updated and augmented our detailed analysis of inflation dynamics in Eurozone earlier this year and maintain our view that current cyclical price pressures are unlikely to morph into a long-lasting trend.
• We expect the inflation momentum to lose steam in early 2022 as base effects of energy prices dissipate and transitory factors due to the re-opening dynamics fully unwind. Economic slack and stubbornly high hoarding component of excess savings dampen inflationary pressures over the longer term.
• But be prepared that it becomes worse before it becomes better. As supply chain constraints seemed to have passed their peak, we keep our eyes peeled on continued material shortages due demand pressures and nascent but spotty wage pressures from scarcity of labor to gauge the risk of indication expectations becoming un-anchored.
• Market-implied inflation expectations are consistent with transient price pressures. The recent rise in German government bond yields was indeed not driven by higher implied inflation expectations but more uncertainty about the future rate changes.
• The prevailing uncertainty over inflation will test the ECB’s credibility and the way it will communicate “looking through” the current cyclical price pressures in formulating its monetary stance.

Please find our full analysis here.

Money supply, saving & hoarding: What you see is not what you get

The discussion about excess saving could (and should) better distinguish the two components of what it is usually called saving, namely saving proper – money that is spent, but not on consumption -, and hoarding?- money that is not spent at all.

• The mere increase in the money balances held by households and businesses underestimates by about 20% the quantity of money withdrawn from circulation and set aside by people in response to the Covid-19 shock.
• Unlocking the money balances that have been hoarded is an underestimated challenge.
• If there is something for policy to deter, it is hoarding; and if there is something to stimulate, it is saving.

Our full report can be found here.

Updated country risk reports

Bolivia: Rated D4 (high risk for enterprises) with a return to political stability amid bleak recovery prospects

Costa Rica: Rated BB3 (medium risk for enterprises) as the path to recovery and fiscal consolidation remains fragile

El Salvador: Rated B2 (medium risk for enterprises), and clear that no recovery will occur without the US

Panama: Rated B2 (medium risk for enterprises) and in for a strong economic rebound

Uruguay: Rated BB2 (medium risk for enterprises) with a gradual recovery on the horizon.