Sweden’s inflation experience can show where the United States and other developed markets are going
There is a whole range of goods rising in price, as evidenced by US consumer prices, which match a 30-year high in September with 5.4% growth compared to the same period last year.
That sounds reasonable. The COVID-19 pandemic and the political response to suspensions and government stimulus unleashed a massive shift in spending on services to goods. Expenditure on US sustainable goods in March was 26% above the pre-pandemic trend.
Suffice it to say that a 26% demand for sustainable goods cannot be met by a modern manufacturing sector that utilizes just-in-time supply chains and negligible spare capacity! As rising demand met a relatively steady supply, the price of sustainable goods rose to the current 11% above the pre-pandemic trend, says Dhaval Joshi, chief strategist at BCA Research’s Counterpoint.
The surprise, however, has been the sticky service prices. That, Joshi explained, is because it was not a classic demand shock. There was no point in service companies lowering prices because their customers still could not get these services. “At the same time, statisticians continued to record the seemingly unaffected price of eating out or going to the theater, even though most restaurants and entertainment venues were closed,” he said.
There is a remarkable country that did not call for suspensions or suspensions – Sweden. And there, the prices of services fell. And now inflation is in Sweden about 3 percentage points less than in the United States
What the Swedish experience indicates is that prices will eventually stabilize. “The increasing demand for durable products is correcting. Since March, it has already decreased by 15% but requires a further 7% reduction to reach the trend before the pandemic, which we fully expect will happen. After all, there are only as many smartphones and used cars as you can own, says Joshi.
When it comes to services, there are two-force wages rising due to higher commodity prices, but the deflationary power in hybrid homes and office work, which will make it difficult for service spending to reach its pre-pandemic trend.
Joshi recommended underweighting the discretionary sector of long-term consumers, underweighting commodities that have not corrected sharply compared to those that have, and staying overweight U.S. government bonds versus government bond-protected securities.