Will the inflation nightmare from four years ago repeat? JPMorgan: Middle East conflict will not follow the same path as the Russia-Ukraine conflict

Ask AI · Why does JPMorgan think today’s wage trends can prevent inflation from returning?

China Financial News Agency March 31 (Edited by Liu Rui) As the fighting in Iran has still not been extinguished for a long time, international oil prices have remained high, geopolitical tensions have continued to escalate, and more and more investors can’t help but look back to the scenes from four years ago.

In 2022, the Russia-Ukraine conflict once triggered an energy crisis, driving wage–price spirals upward and leading to the most severe sell-off in recent decades. And now, with fighting in the Middle East triggering another energy crisis, will the inflation nightmare return?

JPMorgan: The situation is different now

In response to investors’ concerns, JPMorgan’s equity strategy team pushed back, saying that the current macro backdrop differs significantly from 2022 in several key respects.

They believe the most important difference is wages. In 2022, because the late stage of the COVID-19 pandemic was ongoing, labor market distortions caused wage growth to accelerate sharply—this dynamic led to the inflation that was prompted by the Russia-Ukraine conflict staying persistently high, and forced central banks into a round of aggressive tightening.

“It’s not the case right now. Most wage data are trending downward,” JPMorgan strategists said, adding that in the current environment it is difficult to see the formation of a wage–price spiral inflation pattern.

Meanwhile, the policy stances of central banks around the world are also different. In early 2022, the policy interest rates of the Federal Reserve and the European Central Bank were far below the neutral level, and they still viewed inflation as temporary.

But now, policy interest rates across countries are roughly at their historical average levels, and the government bond yield curve has returned to the historical average after being inverted for years. Since the outbreak of the Iran war, the interest-rate market has begun to anticipate that the ECB and the Bank of England will raise rates, but JPMorgan believes that “any rate hikes that come too early could be viewed as a policy mistake.”

On the consumer side, in 2022, because the late stage of the COVID-19 pandemic was underway, consumers were facing suppressed but strong demand that urgently needed to be released, and they also had ample cash on hand. This meant that although prices were soaring at the time, consumption demand remained strong. Businesses also had strong pricing power, enabling them to pass higher input costs on to consumers.

And now, “things are clearly different.” The strategists said.

In addition, the level of global economic activity today is far weaker than it was four years ago: the euro zone’s growth momentum hit above 4% at the start of 2022; it is now around 1%. Moreover, Europe’s energy infrastructure is more complete. Since 2021, the capacity of Europe’s LNG terminals has roughly doubled, and factors that intensified the energy crisis in 2022—such as severe supply shortages (e.g., low coal inventories, French nuclear power plants being shut down)—have also been reduced.

Finally, JPMorgan views artificial intelligence as a key variable that could have a decisive impact.

At present, concerns about how AI will affect jobs are increasing, and with the sentiment in the labor market already weak, this more tends to result in disinflation rather than stagflation.

The JPMorgan team wrote that this “marks the ‘one key difference’ between the arguments for stagflation and the arguments for disinflation, as to which one takes the lead.”

On equities, strategists pointed out that European stock markets are down 11% due to changes in natural gas prices, but the effective change in Europe’s real natural gas prices is only about a quarter of 2022. This suggests that market pessimism triggered by this energy shock is far more severe than it was four years ago.

(China Financial News Agency · Liu Rui)