Since 2021, from emerging markets to developed countries, inflation has come unexpectedly and its resilience has exceeded expectations. By the end of the year, the Fed was forced to turn under inflationary pressure and accelerate the pace of monetary tightening. The causes of this round of inflation are complex, driven by both demand and supply, as well as soaring energy prices. However, over the past decade, ultra loose monetary and financial conditions have buried hidden dangers for high inflation. This paper intends to analyze the evolution of American inflation from the three aspects of liquidity.
Generally speaking, market liquidity has three major destinations: first, it flows into the real economy and turns into comprehensive price rise and inflation; The two is to flow to the financial market, push up asset prices and form asset bubbles. Third, it entered the credit market and precipitated in the banking system and residents' savings, resulting in a decline in the balance sheet and breeding many zombie enterprises.
In response to the public health crisis, countries have adopted unprecedented fiscal and monetary stimulus, with extremely loose money and generous fiscal expansion policies as the bottom of total demand. Compared with developed countries, developing countries have a low level of financial market development, limited absorption of liquidity, and excess liquidity flows into the real economy, leading to the rise of inflation earlier. The direction of liquidity can explain the change of US inflation level from low to high since the pandemic.
The causes of this round of US inflation are multifaceted, and it is difficult to solve it only by monetary tightening. With the gradual tightening of the Federal Reserve and no shortage of liquidity in the market, the recent surge in commodity prices has exacerbated the pressure on the supply side, making it difficult to see the inflection point of inflation in the short term. In the follow-up, we need to pay close attention to the two upward spirals of inflation inflation expectation and wage price rise, which may lead to the decoupling of inflation expectation and make the current inflation more deeply rooted.
US inflation has become a key variable affecting the Fed's decision-making in 2022. Next, we need to see how the Fed can orderly recover market liquidity and properly communicate with the market. If the Fed's tightening does not puncture asset bubbles and trigger economic recession, the US may tolerate long time inflation because the next major direction of excess liquidity is commodities.
Risk tip: the Fed's monetary policy tightening exceeded expectations, the US economic recovery was less than expected, and geopolitical risks intensified.
