gave in New York Times: US government bond investors have come to believe that inflation will be permanent rather than temporary, as they initially thought.
One of the key meters to detect how investors think is the rate called “break even”. At the end of October it hit 3%, which means that this group understands that inflation in the US will be 3% per year for the next five years.
For the Brazilian reader this would sound like good news. But for the United States this means a price rise far greater than at any time in the decade leading up to the covid-19 pandemic.
“The expectations of bond investors are important because, historically, the Federal Reserve — responsible for managing inflation — observes the signals from the bond market when deciding when to raise interest rates”, explains the newspaper in its report.
To better understand the origins and directions of American, Brazilian and global inflation, the Portal do Bitcoin spoke with Rachel Borges de Sá, head of economics at Rico, a company in the XP group.
Rachel says the group is in the middle: she doesn’t think inflation in the United States will be that long, but she understands that it will only return to the pattern that the market is used to in the middle to the end of next year.
The economist explained how the pandemic has affected production chains and why the commodity boom is not helping the real to appreciate — it is always good to remember that Brazil is one of the largest producers of ore and grains in the world.
About cryptocurrencies as a protection against inflation, the head of Rico highlighted a good point: the strength of cryptoactives grows when governments issue money; however, the general expectation is to reduce stimuli, making money and other assets scarcer and, in theory, reducing the power of bitcoin as a store of value.
Read the full interview below:
Are cryptocurrencies a good way to protect against inflation?
Where does the idea that cryptoactive would protect you from inflation come from? From the fact that he is finite. It’s not like fiat currency, which is issued without backing. If we think from the point of view of what is being imagined as the next steps for the global economy, there will be a reduction in stimulus. In theory, the more money is being played in the economy, the more cryptoactives value themselves, because they have a backing. But the movement is the opposite, the reduction of stimuli.
We don’t have cryptoactive recommendations because we don’t analyze each of these cryptoactives. What we say is that it could be an interesting asset, especially now that institutional investors are entering. But we always emphasize that it should be a small part of the portfolio. If the investor wants, we advise it to be less than 5% of the portfolio and only if it has a bolder profile, because it has a lot of volatility.
What is putting pressure on inflation in the US and the rest of the world?
We are going through a pandemic period in which a lot of things were closed for a long time. So demand was maintained, but supply was reduced. For an entirely unprecedented factor, the factories were closed, the exploration of minerals stopped, the ports stopped. Everything stopped for a while and as it came back, it wasn’t the same come back. Some countries have already returned, others are with a zero-tolerance policy like China — there a case of Covid makes everything close, the port, the city — and that damages value chains a lot and makes prices rise.
Cost inflation, which is an inflation more linked to producer prices, is under severe pressure. So when we look at commodities: oil is too high, natural gas is too high. Everything that is input, and that goes beyond commodities: plastics, rubber, glass. We are in a very big problem in global supply chains and this causes the price to go up and there is even a shortage of these items. So this is the main brake that we see in the economic chain at the moment.
In addition to the pandemic, what has been influencing the rise in global inflation?
It’s the perfect storm: it has geopolitical movements and natural movements. The lack of rain in countries that depend on energy from hydroelectric dams increases the demand for natural gas. And then there is an issue between Russia and the European Union, in which Russia is making it difficult to export gas. Europe had a very cold autumn. A bunch of stuff on top of another. There is OPEC that said it will not increase the supply of oil even with demand rising a lot. All of this puts pressure on inflation.
How did central banks react to the difficulties arising from the pandemic?
Interest rates were too low for a long time to stimulate the economy because of the pandemic. Around the world, when the pandemic hit, central banks started to lower interest rates and use other monetary tools, such as going to the market and buying bonds. Not only from treasury debt, but also assets and even derivatives. Because if the Central Bank is increasing its balance sheet, it is taking this asset out of circulation and indirectly injecting money into the economy. This is to encourage the economy beyond the policy of managing low interest rates.
We then had a very expansionary monetary policy. Even in Brazil we had real interest, which is interest minus inflation, super low. Now, in the United States, it is being discussed that the Central Bank will start to reduce stimuli. You have an economy that has already largely recovered from what went down in the pandemic.
Could the trillion-dollar packages that US President Joe Biden intends to implement affect US inflation?
There are great economists on both sides. Some economists think that the infrastructure package and the American family package are not inflationary in and of themselves, because it is an expense that you have over ten years, that increases productivity, that this will not necessarily have an inflationary pressure. But it stands to reason that the more money in the economy, the greater the expectation that prices will rise in the future.
What is your view on whether the upward trend in US inflation is temporary or permanent?
In our view it is the middle ground. We think much of what’s happening in US inflation is temporary. When you look, for example, at the price of used cars, the services sector, such as hotels, plane tickets, many people want to resume activities and, therefore, these pressures will continue for a while.
What’s been more enduring than expected: this supply chain issue. Mainly due to the non-uniform return of countries to normality. And there was also no way to calculate the impact of the stopped factories, this had never happened in history.
But we think that this pressure should subside over the next year and that the American Central Bank is going to reduce the account of assets it has. And the discussion now is when he will start raising interest rates.
But we don’t think that inflation in the United States will remain much above the target over the next year. Of course, in 12 months this is still high. But we think that should start to give way by the middle to the end of next year.
The rise in commodity prices shouldn’t it be beneficial to Brazil and help improve the exchange rate?
Our exports are doing very well, if you look at the balance sheets. But from the exchange point of view, it is being neutral. Given the amount of money coming in, the real should be more appreciated, but the dollar is a financial asset, so it also reflects risks that are mainly fiscal and political. The investor wants to price, he prices in currency.