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Is stagflation inevitable?


The global economy was already grappling with elevated inflation levels before Russia’s invasion of Ukraine, but with Brent Crude trading at almost $140 a barrel this morning, it’s evident to us that the situation is likely to get worse before it gets better. The rise in Brent following the weekend's story that the US is considering banning Russian oil—which accounts for around 8% of global imports—has prompted fears of an impending supply shock. However, it’s not just oil prices that are driving the inflation story. Commodities are higher overall, with the prices of agricultural products and industrial metals soaring. The risks posed by energy prices roiled through European markets this morning, where EUR/CHF briefly traded below parity and currencies like the Polish Zloty and Hungarian Forint tumbled to all-time lows.

The risk of stagflation—where rising prices are accompanied by static or negative growth—is certainly present, and is going to make central bankers’ jobs much more difficult in the coming months. The highly watched spread between the US two and ten-year Treasury yields has narrowed to just 24 basis points this morning. An inversion of the yield curve is generally a sign of an impending slowdown or recession. Despite troubling signs, last week Federal Reserve Chair Jerome Powell came out in support of a 25bps hike at the March meeting before Friday’s US employment data beat estimates. It now seems inevitable that developed central banks will embark on a rate-hiking cycle over the coming months, but it’s not apparent if they can mitigate the impact of Putin’s war.

Bottom line: It’s hard to see an end to the Russia-Ukraine conflict, with attacks continuing and 1.7m civilians having fled the region because of Russia’s invasion. As a consequence, yes, there’s a high probability of stagflation, and yes, consumers in Western democracies will probably see a hit to their finances, but it just feels insensitive to talk of such things during the ongoing humanitarian crisis.

The week ahead


Cable was pressured over the last week as the US Dollar fell into favour amid the Russia-Ukraine conflict, while this morning GBP/EUR was trading at levels last seen in the summer of 2016. Events in Ukraine continue to escalate, and Bank of England Senior Official Jon Cunliffe has warned of a market correction as sanctions on Russia begin to ramp up. The BoE is facing quite the headache at its next policy meeting on the 17th of March as soaring commodity prices threaten to fuel inflation further, while signs of slowing growth are not welcome in the face of potential interest rate hikes. It’s a quiet week on the data front for Sterling, with markets closely watching developments in Ukraine. 

  • The Halifax House Price Index m/m rose 0.5% in February despite analyst estimates of a 1.0% gain.
  • British Retail Consortium Retail Sales Monitor y/y is due to be released tomorrow with the January print reading 8.1%.
  • UK Gross Domestic Product m/m will be published on Friday, with a 0.2% print expected.
  • Industrial Production m/m data for January is also due at the end of the week. Forecasts suggest a gain of 0.2% versus 0.3% in December.



EUR/USD broke through the $1.10 support level last week, trading at its lowest levels since May 2020, as the situation in Ukraine deteriorated. European markets have since opened lower as Western allies discuss a ban on Russian oil. The European Central Bank will be meeting this week, and analysts expect the postponement of any major policy decision as the Russia-Ukraine conflict continues to create uncertainty. However, with the prospect of slowing growth and energy price rises that threaten to exacerbate inflation, rate hike timing is key.  

  • German Retail Sales m/m climbed 2.0% in January following a 5.5% decline in December.
  • German Industrial Production m/m is forecast to come in at 0.5% for January versus a -0.3% print in December.
  • Italian Industrial Production m/m is expected to read 0.0% in January after declining 1.0% in December.  
  • On Thursday, the European Central Bank will publish its latest Monetary Policy Statement along with an interest rate decision.



The US Dollar Index has climbed around 2.0% over the last week, while the S&P 500 slipped another 60 basis points amid market uncertainty. Commodity prices continue to move higher, with WTI Crude trading above $120 per barrel this morning. Federal Reserve Chairman Jerome Powell emphasised the need to be nimble at the next monetary policy meeting and stressed he would be more inclined to push for a 25 basis-point hike. He left the door open to more aggressive rate hikes in the future as geopolitical uncertainties continue to cloud the growth picture.   

  • JOLTS Job Openings for January will be released on Wednesday, with analysts expecting a reading of 10.91m compared with 10.93m in December.
  • US Consumer Price Index and Core CPI m/m for February is expected at 0.8% and 0.5% following 0.6% readings in January.
  • US Unemployment Claims for the week ending the 5th of March will be released on Thursday with expectations set for a 220K reading.
  • University of Michigan Consumer Sentiment data will be published to close out the week. Analysts are expecting a 61.3 reading.


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