Growing Inflationary Pressures Force Even the Swiss National Bank to Hike Rates

The financial world last saw the Swiss National Bank (SNB) hike its interest rate back in 2007. It took “signs of inflation also spreading to goods and services that are not directly affected by the war in Ukraine and the consequences of the pandemic” to force the SNB’s hand (from the Introductory remarks by Thomas Jordan, head of the SNB). The rate move from -0.25% to -0.75% took financial markets by surprise and sent the Swiss franc soaring. USD/CHF declined 2.8% on the day in a move that may have created a double top.

The SNB insisted that “the tighter monetary policy is aimed at preventing inflation from
spreading more broadly to goods and services in Switzerland.” While the SNB also warned that these inflationary pressures may force the SNB to increase rates further, its current forecast for inflation at the -0.25% rate is for inflation to return to the 2% target starting next year. Note the significant increase in the inflation forecast since March (the red line over the yellow line).

The fast transmission of price increases also caught the SNB’s concern: “…price
increases are being passed on more quickly – and are also being more readily accepted – than
was the case until recently.” This acceptance is one of the drivers of higher inflation expectations that can lead to stubbornly high inflation. Moreover, second order inflation effects are threatening the inflation outlook. Interestingly, weakness in the Swiss franc is suddenly working against the SNB’s attempts to avoid deflation: “the Swiss franc has depreciated in trade-weighted terms, despite the higher inflation abroad. Thus the inflation imported from abroad into Switzerland has increased.” This comment makes me much less inclined to short the Swiss franc going forward.

In other words, the Swiss economy has been hit from all angles with price-related shocks. Content to keep rates at -0.25% for so many years, the SNB had to respond with a rate hike. With another 50 basis point hike on the table, the SNB has joined a growing chorus of central banks scrambling to normalize monetary policy. The race to the bottom of devaluation suddenly reversed this year.

Be careful out there!


Persistently Elevated, Unactionable Inflation

Bonawyn Eison, CNBC Fast Money commentator, used the phrase “persistently elevated, unactionable inflation” to describe the current inflationary cycle. Ahead of the disappointing report on May inflation, Eison pushed back on the “peak inflation” narrative as part of an attempt to “reverse engineer” a reason to buy the stock market. While he framed the desperate gaze over the inflation horizon in stock market terms, his characterization is quite appropriate for today’s overall inflation problem. Inflation has been persistent thanks to a powerful convergence of massive monetary stimulus, equally potent fiscal stimulus, and a host of economic disruptions. In turn, inflation promises to remain elevated for quite some time. Perhaps most importantly, the tools for fighting inflation are small compared to the size and the near intractability of the problem. For the Federal Reserve in particular the path to fighting inflation is fraught with the economic perils of stagflation.

The lure of the “peak inflation” narrative has been strong since the report on March inflation. The appeal is natural because of the sense that over time all economic conditions revert to the mean (or the average). However, the rush to declare the end of today’s problem with inflation has been particularly meaningful because it occurs in the middle of a desperate, global desire to return to some form of the “normalcy” we (think) we enjoyed before the pandemic. To their credit, various Federal Reserve members tried to soft pedal the idea of peak inflation, including the San Francisco President back in late April. They have remained nearly uniform in their stated resolve to focus on fighting inflation. The path from 8.6% to anything close to the Fed’s comfort zone does not start with hoping for a peak in inflation.

That 8.6% is where the headline Consumer Price Index (CPI) hit in May. Inflation hurtled March’s 8.5% for a new high for this inflationary cycle. The “peak inflation” crowd might now think surely inflation cannot go any higher from here. Perhaps this hope works out this time, but it matters little in the face of persistent and elevated inflation. Moreover, on the same Fast Money episode featuring Eison’s commentary, Lindsey Piegza, chief economist at Stifel, made an excellent point about the lagging nature of the CPI. Piegza pointed out that the worst impacts of the Russian invasion of Ukraine and the COVID lockdowns in China have yet to hit the CPI. If so, CPI may not continue to increase, but inflation will remain high for quite some time.

The broad-based nature of the May CPI increases suggests that inflation will indeed remain far above the Fed’s comfort zone for quite some time. Both the month-over-month and, of course, year-over-year inflation numbers were elevated across major categories (numbers are monthly and then year-over-year):

  • Food: 1.0% and 8.6%
  • Energy: 3.9% and 34.6%
  • All items less food and energy: 0.6% and 6.0%
  • New vehicles: 1.0% and 12.6%
  • Used cars: 1.8% and 16.0%
  • Shelter: 0.6% and 5.5%

The persistent rise in shelter costs is particularly notable given the Fed’s sudden sense of urgency on normalizing monetary policy implicitly came from housing costs.

I see at least one lesson from these numbers: inflation will not peak until it peaks. In other words, there is little point in straining the eyes over the horizon seeking the end of this inflationary cycle. Whatever the specific numbers, inflation here in the U.S. and across many nations promises to be persistent and elevated and will frustrate the economic agent who try to act against it without causing other economic fallout.

Be careful out there!