Charts of the Week: Transport Tremors

Summary

• The US auto industry suffers high prices and soft sales.
• In the EU, sky-high diesel prices could stick around.
• Fed hiking could land it in a spot of balance-sheet bother.
• Bank of England forecasts show inflation undershoot.

US Auto Industry Feeling the Pinch

In the US, auto sales are soft, and used care prices are through the roof. Supply constraints have allowed auto-related companies to charge top dollar (Chart 1). As John explains, the price rises feed inflation. Equally importantly, they reveal a broader economy still feeling the effects of Covid-19. When auto sales start rising, we might be on the brink of returning to normal for real.

Diesel Prices to Remain Sky-High?

High diesel prices are contributing to record-breaking inflation in the EU (Chart 2). You might expect them to fall back to the suppressed prices we enjoyed throughout 2015-2021. But this, if anything, was more an exception to the rule. In 2011-2015, they were almost double the price on average – could we see another extended period of elevation? Henry explores more in his pre-mortem.

Fed in Hot Water

The Fed is hiking rates aggressively to combat inflation, but this tightening is a double-edged sword. The higher it hikes, the more interest it must pay on its liabilities. If the Fed hikes to 8%, as Dominique anticipates, the Fed’s net interest income would turn negative this month (Chart 3). By 2023, net interest income would become minus $230bn and interest payments on reserves, RRP and TGA would represent $357bn. With the Fed’s capital currently representing $41.7bn or 0.5% of total assets, policy tightening would effectively put the Fed wipe out Fed equity. This would have serious consequences, political and otherwise.

BoE Inflation Undershoot

The BoE’s forecasts now show inflation undershooting target even if no further hikes are performed (Chart 4). They also implicitly show (as one would expect), that hiking now will make no difference to the peak Q4 inflation rate. Recession and rising unemployment are on the horizon. On this basis, Henry still thinks BoE will not hike anything like the 100bp priced in to yearend. 

Matthew Tibble is Commissioning Editor at Macro Hive. He has worked as an editorial consultant and freelance editor for companies such as RiskThinking.AI, JDI Research, and FutureScape248.

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