As nations continue to recover from the COVID-19-induced recession, the highest inflation levels seen across the economies in more than a decade are roiling the markets.
In China, which happens to be the world’s second largest economy, factory gate prices in the month of May rose by 9% -- their fastest annual pace in over 12 years owing to surging commodity prices.
In the US, the world’s largest economy, consumer prices for May accelerated at their fastest pace in nearly 13 years as inflation pressures continued to mount in the economy.
These numbers outline the global inflation pressure at a time when central banks and the governments across the world are trying to catalyse the post-pandemic growth – having lost one good year to the pandemic. All these numbers have increased the risk of stagflation in the economies, as inflation has peaked at a time when growth has plateaued.
However, there is a silver lining here as the inflation numbers are expected to be short-lived, and it may not even lead to reactions from the central banks across the world. That is what most of the analysts and opinion-shapers are discounting for. But are they correct in their assertion?
The world’s top bankers, who control billions and trillions worth of business in Wall Street, are of different opinions. They believe that inflation is here to stay for a long time.
JPMorgan Chase & Co (NYSE:JPM), the only Wall Street bank to make it to the list of top five largest banks globally, has been “effectively stockpiling” cash and not using it to buy treasury bonds or other forms of investments because of the possibility that higher inflation will force the Federal Reserve to increase the interest rates.
To put it simply, the largest bank by assets in the US has positioned itself well to benefit from rising interest rates, which will give it a legroom to buy higher-yielding assets.
“We have a lot of cash and capability and we’re going to be very patient, because I think you have a very good chance inflation will be more than transitory,” Jamie Dimon, longtime JPMorgan CEO, said at Morgan Stanley US Financials Conference on Monday.
“If you look at our balance sheet, we have US$500 billion in cash, we’ve actually been effectively stockpiling more and more cash waiting for opportunities to invest at higher rates,” Mr Dimon said.
Mr Dimon also expects to see higher interest rates and more inflation and assured that the bank is prepared for that.
Known as one of the most prudent CEOs on Wall Street, Mr Dimon is the latest to jump into the ongoing debate on whether the current high inflation is a result of temporary aspects of the reopening of economies (like dearth of raw materials or supply chain issues) or could it be more lasting. This has led to financial markets split into two camps – with the US Federal Reserve on side and many other private parties on the other side.
While the Fed officials have called the current spike in inflation transitory in nature, meaning temporary and short-lived. However, there is a growing chorus of voices, including that of Deutsche Bank economists and hedge fund billionaires, who have warned of consequences should the Fed ignore inflation. Till now, the central banks across the globe have reacted to inflationary trend by pausing the interest rates.
The words of Mr Dimon seem to have been echoed by James Gorman, CEO of rival Wall Street bank Morgan Stanley. On Monday, Mr Gorman said in an interview to a TV channel that he also thinks that higher inflation may be lasting in nature and that the Federal Reserve could be forced to increase the interest rates earlier than expected.
“The question is when does the Fed move? It has to move at some point, and I think the bias is more likely earlier than what the current dots suggest, rather than later, ″ Mr Gorman said.
Meanwhile, JPMorgan’s decision to pile up cash accounts for about half of the decrease in the anticipated net interest income (NII) this year, Mr Dimon added. The other half of the dip comes from lower credit card balances, he said. The bank now expects US$52.5 billion in NII in 2021, 454 basis points down from the US$55 billion-mark it anticipated in February.