Since the unrest in the Middle East began, nearly all container ships have been rerouted away from the Red Sea/Suez Canal towards the longer route around the Cape of Good Hope (Exhibit 1).  For U.S. retailers, this shift has mostly affected their European markets, which include shipments between Asia and Europe. This has added up to two weeks to the normal 35-day trip and created long gaps between the arrivals of vessels in European ports.  Moreover, the Panama Canal drought and Baltimore bridge collapse have all disrupted regular global supply chains. Exhibit 1: Red Sea – Cape of Good Hope

Inflation has continued to soar across much of the world and is significantly above central bank targets in most advanced economies. In the US, UK and euro area it is at its highest level in decades, raising concerns about a return to the ‘Great Inflation’ of the 1970s. In Fathom’s central scenario (70% probability), inflation returns to central bank targets next year. However, we assign a 30% probability to a ‘Back to the 70s’ scenario, where inflation expectations become unanchored, wage-price spirals re-emerge, and inflation dynamics briefly mirror those of the 1970s. Refresh this chart in your browser | Edit the chart

Western advanced economies are dealing with a period of above-target inflation which central banks expect to be transitory. However, for a while Fathom has been pointing out that households have built up vast savings during the pandemic, which if unleashed would push up aggregate demand and create further upward pressure on inflation. Even if those savings remain unspent, there are still clear upside risks to the inflation outlook. One of those risks is the de-anchoring of inflation expectations. Refresh this chart in your browser | Edit the chart in Datastream   The majority of measures of household inflation expectations in the US

Refresh this chart in your browser | Edit the chart in Datastream Evidence is starting to build to support the case that the net result of the post-pandemic recovery will be inflation. As Fathom has discussed in recent research, the upward pressure on inflation will come in more forms than base effects, with pressures in the form of a build-up in household savings and the monetary overhang pushing up inflation too. But absent additional pressures, how big will those base effects be? As a measurable example, the UK government temporarily cut VAT from 20% to 5% for certain items of hospitality and

Next week the US Federal Reserve will hold a research conference in Chicago as part of its review into the objectives and the operation of monetary policy. Further meetings will be held with stakeholders over the coming months, with findings due to be communicated to the public in the first half of next year. In recent years the widespread practice of targeting low rates of inflation has been found wanting. Our chart shows a long moving average of inflation in six inflation-targeting economies: the US, the euro area, the UK, Japan, Canada and New Zealand. Central Banks in each of