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Scratching the surface

Coronavirus has been the dominant theme for a long time now and while we have often had to consider supply-induced cost increases, the demand-induced type of inflation has been largely absent. Some have argued that has all changed in the past several months. The US legislature under US President Joe Biden has passed a $1.9tn stimulus package which is set to stoke spending, and therefore measures of inflation. ‘More money, more spending, higher prices’ just makes sense, but the price pressure resulting from relief measures is difficult to quantify.

First and foremost, one must consider the composition of the package to understand its impact on consumers and their spending habits. The bill includes $350bn in state and local government funding to help bridge the budget gaps caused by the pandemic on public and health services. While these measures should keep the wolf from the door in many jurisdictions, it is unlikely to cause additional spending. The $300bn in unemployment benefit and direct payments of $1,400 for most adults are another kettle of fish.

The Covid-19 episode has had a dramatic impact on unemployment, which reached 13% in the second quarter of 2020. For comparison, unemployment after the Global Financial Crisis topped out at 10% in the final quarter of 2009. The good news is that by the end of 2020, that had halved to 6.77%. The Labor force participation figure, which dropped 2% to 61.4%, tells the other side of the story—with employed people as a percent of population at its lowest level since 1977.  When we consider the group excluded from unemployment statistics, we see those helped most by the direct payments. Cyclically unemployed individuals, who have had to scale back spending under unemployment, will benefit from both direct payment and unemployment programmes. 

Bottom line: Spending on items within the CPI consumption basket is likely to increase under the new bill, although not to the extent some pundits argue. For instance, basic items within the basket (e.g. apples, diapers, utilities) are essentials and would not have undergone a meaningful decline in demand, even for those unemployed. Some other less-essential items (e.g. cars and washing machines) will see some uplift, but only to the degree that the household have closed household budget gaps caused by unemployment. As the economy improves more of that spending will manifest, but the pacing is likely to be gradual and is unlikely to shift inflation in a dramatic way. 

The week ahead


Sterling was mixed against the G10 currencies last week after the eruption of coronavirus vaccine rows between the EU and the UK. This caused GBP/EUR to fall to €1.1630 before recovering back above €1.1670 shortly after the UK recorded 512,108 vaccinations on Saturday, the highest for a month. This marked rise in vaccination rates looks set to climb in the coming weeks as more supply becomes available to the UK. Bank of England Governor Andrew Bailey announced last week that the bank will move bond purchases forward to prevent a further short-term climb in bond yields. The Bank of England will meet this week with no expectations of changes to the current base rate.

  • Rightmove House Price Index m/m was recorded at 0.8% for March vs 0.5% in February.
  • The Bank of England are due to meet this Thursday to provide the latest monetary policy update.
  • MPC Member Andy Haldane is due to speak on Thursday at 12:30pm.
  • Gfk Consumer Confidence looks to be improving, forecast at -20 in March vs -23 in February.


The Euro recovered last week rising 0.30% against the Dollar after a difficult week beforehand falling 1.30%. However, the Eurozone continues its struggle in the coronavirus vaccine rollout with AstraZeneca announcing this weekend that they will be scaling back their deliveries of the vaccine to the bloc. This comes after a number of European nations reported the vaccine has caused adverse side effects. Some countries also appear to be heading into a third wave, with Italy tightening restrictions and announcing a national lockdown over the Easter weekend. European Central Bank President Christine Lagarde will speak before the economic committee at the European Parliament on Thursday.

  • German WPI m/m came in at 1.4% for February vs 2.1% in January.
  • Eurogroup meetings are scheduled all day today.
  • The Dutch Parliamentary Election is due to take place on Wednesday.
  • ECB President Lagarde Speaks on Thursday at 9:00am and 12:00pm.


US markets performed well last week as the S&P 500 reached record highs and President Joe Biden signed the $1.9tn stimulus package into law. This improvement in risk appetite pushed the US Dollar Index lower making it one of the lowest performing G10 currencies last week. President Biden provided further confidence in his address to the nation, stating that all adults will be eligible for the coronavirus vaccine by the 1st May. Biden has expressed hopes that the US will be able to remove Covid-19 restrictions by 4th July. The US' 10-year treasury yeild currently sits at 1.62% and many are wondering if there will be a change to the Federal Reserve’s asset purchase programme this Wednesday after previously muted comments from Fed Chair Jerome Powell.

  • Retail Sales and Core Retail Sales m/m are due on Tuesday and are expected to read -0.5% and 0.2% respectively for February vs 5.3% and 5.9% for January.
  • Crude Oil Inventories will be released on Wednesday.
  • The FOMC will meet this Wednesday and provide their latest monetary policy update along with any interest rate decision.
  • Unemployment Claims will be announced on Thursday.


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