Waves of Inflation

March 12, 2023 Jeffrey Kleintop
Although inflation may be receding, intermittent waves of price increases may cause investor uncertainty about the direction of economic growth and central banks' policy response.

Everything Everywhere All At Once could describe the last two recessions (the Global Financial Crisis of 2008-09 and the Pandemic of 2020). While the film of the same name was among the winners of Academy Awards this weekend, the aforementioned recessions had the honor of being among the sharpest and deepest since the Academy began to hand out Oscars 95 years ago. During these periods, everything turned down: manufacturing, services, construction, retail, and trade. Everywhere around the world, all major developed countries fell into recession, seemingly all at once. Whether or not we are currently in the midst of a global recession is a matter of some debate, because this time it isn't like that at all.

It's not everything. Global manufacturing has contracted. Factory output has fallen for many months and international trade has declined in the fourth quarter at a pace only seen during recessions. But services are booming. We don't need to look at a chart to get a sense of this, it's evident to those trying to book an airline ticket or get a reservation at a favorite restaurant. Back in 2020, the pandemic led to a boom in demand for goods while services slipped into a recession. The recession has since rolled on from services to goods as economies reopened.

It's not everywhere, nor all at once. There have been many negative gross domestic product (GDP) quarters lately among the Group of 7 economies (noted as red on the table below). Yet, Canada's oil-driven economy has avoided declines as it benefits from rebounding demand and tight supplies. Few of the negative quarters have been back-to-back and the timing has not been synchronized across all the economies.

The NOT everything, NOT everywhere, NOT all at once recession

Table illustrates the quarterly GDP Growth from fourth quarter 2021 through first quarter of 2023, estimated, for the G7 nations of Canada, France, Germany, Italy, Japan, U.K., and U.S.

Source: Charles Schwab, Bloomberg, Macrobond, National Sources, data as of 3/12/2023.

*1Q2023 is Bloomberg-tracked economists' consensus forecast.

We could still make the case for declaring a global economic downturn, amplified by last week's failure of Silicon Valley Bank—the first bank failure since the last recession in 2020; calling it a recession, a rolling recession, or some sort of "landing." But this unusual rolling characteristic could persist in the months and quarters to come and may mean further market volatility.

Wave of growth

Despite the red in Q1 in the table above, we are now seeing a wave of stronger growth building. Data in all major regions has been coming in better than expected.

  • The widely watched composite global Purchasing Managers' Index (PMI) rose above 50 in February, crossing back above the dividing line between contraction and growth.
  • Job growth has been stronger than expected this year in the United States, Canada, and United Kingdom.
  • China's economy has roared back, illustrated by the 10-year high in the Purchasing Managers' Index and an all-time high in air traffic.
  • Economists' expectations for first quarter GDP growth have been revised higher or remained steady across major developed countries. In the U.S. and Canada, these revisions have erased the flat-to-negative GDP forecasts made at the start of the year.

Better first-quarter GDP forecasts

Bar chart shows economists' GDP forecasts at the start of 2023 and as of 3/7/2023 for the U.S., Canada, Eurozone, U.K., Australia, and New Zealand.

Source: Charles Schwab, Bloomberg data as of 3/12/2023.

Waves of inflation

COVID infections came in waves as time passed and inflation might do the same. Could the recent wave of stronger global growth trigger an echo wave of inflation? Inflation, measured as a year-over-year rate of change, has come in waves in the past. Four countries with long histories of CPI inflation data include the United States, the United Kingdom, Canada, and Australia, and saw waves of inflation in the 1970s, as you can see in the chart below that shows the current path of inflation in orange and the path from the mid-60s to the early 1980s in blue.

Inflation has come in waves before (U.S., U.K., Canada, and Australia)

Series of four line charts depict inflation in the U.S., U.K., Canada, and Australia during 1966 – 1982 and from 2014 to the present.

Source: Charles Schwab, Bloomberg data as of 3/2/2023.

Now the current period is not exactly like the series of shocks driving inflation in the 1970s—there are many differences. But the 1970s dramatically illustrate inflation's tendency to be volatile, even after peaking. Similar behavior has also been seen at other time periods. For example, inflation peaked in April of 1991 in the U.K. at 8.5% before starting its decline. However, just two months later, CPI rose briefly, and the FTSE 100 Index dropped 8%. As the year-over-year pace of inflation receded in the 12 months following the 1990-91 inflation peaks, several economies experienced waves of upticks which often coincided with drops in the stock markets.

History shows that it is probable that inflation is not likely to recede in a linear fashion in the coming months and quarters. Like subsequent waves of COVID, waves of inflation could be milder in their impact on the economy and markets, yet still cause investor nervousness by raising uncertainty about the direction of economic growth, inflation, and central banks' policy responses. It's possible that any upticks in inflation coinciding with the recent wave of growth could delay central banks from declaring an end to rate hikes. The stronger growth, raising the potential of a wave of inflation, had resulted in a surge in terminal rate expectations for central banks. Although that was reversed late last week on news of the bank failure, this reversal may prove to be only temporary.

Terminal rates on the rise?

Bar chart shows expected terminal interest rate targets as of February 1st, March 7th and March 13th for the central banks of the U.S., Canada, Eurozone, U.K., Australia, and New Zealand.

Source: Charles Schwab, Bloomberg data as of 3/13/2023.

The uncertainty as to how long the rate hike cycle may last or how far it may go has the potential to drive stock market volatility. The rolling waves of economic activity, affecting different areas at different times means there are potential global investment opportunities to consider that may help to manage some of the seasickness investors might develop while staying invested in the markets and riding these waves of growth and inflation. Short-duration stocks which have continued to outperform in the first quarter of 2023 after outperforming during all of 2022 (see our article from April 2022 on Hedging Stocks Against Rising Rates for more) may offer investors a way to manage the volatility.


Michelle Gibley, CFA®, Director of International Research, and Heather O'Leary, Senior Global Investment Research Analyst, contributed to this report.

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