skip navigation

Stay up to date on timely topics and market events. Subscribe to our Blog now.

24 January 2022

Global Inflation Update

By Richard A. Booth, Frederick R. Marki, Dean French

Stay up to date on timely topics and market events. Subscribe to our Blog now.

With headline inflation remaining elevated globally (Exhibit 1) we revisit the specific inflation drivers in three major economies: the US, eurozone and UK. We highlight differences in recent inflationary impulses, our expectations for inflation trajectories over the coming months and the potential implications for bond yields.

Exhibit 1: Inflation Rates on the Rise—US, Eurozone and UK
Explore Inflation Rates on the Rise—US, Eurozone and UK
Source: Bloomberg, Statistical Office of the European Communities, UK Office for National Statistics and US Bureau of Labor Statistics. As of 31 Dec 21. Select the image to expand the view.


US inflation has run much higher in 2021 than either Western Asset or the Federal Reserve (Fed) projected just a year ago. This upside surprise has been driven primarily by three key factors: 1) Energy prices have risen approximately 50% over the last 12 months; 2) the switch in demand from services to goods during the Covid pandemic continued in 2021, and 3) bottlenecks in goods production continued to push goods prices higher.

This sudden increase in goods demand put a strain on production and delivery systems already impacted by the pandemic. Prices surged across goods that had seen little inflation, and even deflation, for the past two decades (Exhibit 2). Service inflation, which had run above headline inflation for the past two cycles, declined at first but has since recovered and is now close to average levels. A major component of service price inflation, which has only recently exceeded prior trends, is the cost of shelter.

Exhibit 2: Core Service Inflation Only Slightly Higher Than Pre-Covid
Explore Core Service Inflation Only Slightly Higher Than Pre-Covid
Source: Western Asset, US Bureau of Labor Statistics. As of 31 Dec 21. Select the image to expand the view.

The strength in rents and home prices we have seen since late-2020 will push shelter inflation to around 5% for at least the first half of 2022, keeping core inflation elevated over this period. However, more recently we are starting to see signs of slowing in terms of increases in rents, prices and house-buying activity.

The poster child for bottleneck pricing is used cars, which are up 50% over the last year driven by higher demand for autos due to the pandemic migration from cities to suburbs combined with globally constrained production that has yet to fully recover. While used car auction prices are still at their highs, monthly gains have subsided recently and we anticipate them peaking in 1Q22 as new car production comes back on line (Exhibit 3).

Exhibit 3: Used Car Indexes (NSA)—Rebased to 100 Pre-Covid
Explore Used Car Indexes (NSA)—Rebased to 100 Pre-Covid
Source: Western Asset, US Bureau of Labor Statistics, J.D. Power, Manheim. As of 31 Dec 21. Forecasts by Western Asset, through 30 Jun 24. Select the image to expand the view.

Despite the initial pandemic impacts on both demand and supply lessening, inflation should continue to remain high through the first two or three months of 2022. While housing inflation will likely persist, energy prices have already begun to turn lower and some goods prices, such as used cars, should also fall. This will likely lead to inflation dropping sharply into the latter half of the year. This, combined with the Fed ending TIPS-supportive asset purchases at the end of 1Q22, and the potential for higher policy rates thereafter should push real yields higher, especially in the 5-year tenor.


Inflation in the eurozone has likely peaked, but over the next three months the risks are that it does not fall back as much as expected on the headline measure. This stems from energy services which is a combination of electricity and heating costs. Exhibit 4 illustrates that this is a much bigger part of the inflation story in the eurozone than in the US.

Exhibit 4: Contribution to Annual Inflation From Energy Services
Explore Contribution to Annual Inflation From Energy Services
Source: Western Asset, US Bureau of Labor Statistics, Statistical Office of the European Communities. As of 31 Dec 21. Select the image to expand the view.

The rise in energy service inflation is a combination of rising natural gas and carbon prices in Europe. Natural gas prices have been rising as storage levels are low after a cold winter last year; flows from key supplier Russia have been lower than average as have electricity generation from both wind and solar. On the carbon side (which at current prices is around 60% of the wholesale electricity price), some electricity producers have switched from natural gas to less expensive coal, which has increased the demand and prices for CO2 emissions quotas. The scale of these increases is highlighted in Exhibit 5.

Exhibit 5: Energy Price Increases
Explore Energy Price Increases
Source: Bloomberg. As of 22 Dec 21. Select the image to expand the view.

In the last forecast round, the European Central Bank (ECB) raised its annual inflation forecasts for 2022 to 3.2% and to 1.8% for 2023 and 2024, respectively. This is broadly in line with current market pricing, in contrast to the US and UK, both of which have market expectations for inflation higher than their respective central banks’ forecasts. With ECB asset purchases falling, net supply rising and the potential for sticky headline inflation in 1Q22, this should keep pressuring nominal yields higher.


Inflation in the UK rose more than expected in 2021, driven by the dynamics described earlier for the US and eurozone: supply-chain disruption, bottlenecks amid supply and demand shocks during the course of the pandemic, and significantly higher energy prices. While the effects of the pandemic clearly dominated, another factor to consider is the impact from the UK’s withdrawal from the European Union, particularly since the end of the Transition Period, which concluded at the end of 2020.

As the fog of the pandemic clears, there are two main ways that we expect the “post-Brexit” effects on inflation to become clearer. The first relates to the labour market, which a large number of European nationals left the UK during the Covid pandemic. Consider for example a European national that had moved to the UK in recent years, worked in hospitality and lived in rented accommodation—if pandemic rules meant that their job was lost or furloughed and there were heavy restrictions on any social interactions, returning to live with family in their home country would likely be an appealing option. Post-Brexit visa rules make it much more difficult for EU nationals to work in the UK and employers have reported significant difficulties in hiring. Against this backdrop, the Bank of England (BoE) is concerned that the tight labour market (the unemployment rate is 4.2%in the UK, and there are a record 1.2 million job vacancies, per Exhibit 6) will continue to exert upward pressure on wage growth, which could combine with the current high inflation to cause medium- and longer-term inflation expectations to become entrenched. Against these concerns, in December 2021 the BoE became the first G-7 central bank to raise interest rates since the outbreak of the pandemic.

Exhibit 6: UK Job Vacancies, Unemployment and Average Earnings Growth
Explore UK Job Vacancies, Unemployment and Average Earnings Growth
Source: Bloomberg, UK Office for National Statistics. As 05 Jan 22. Select the image to expand the view.

The second way we expect inflation to be affected is due to greater trade frictions post-Brexit. While there are hopes that businesses will adjust to the new rules and requirements, there are costs associated with doing so and these could feed through into higher consumer prices.

The BoE expects inflation to peak around 6% in April 2022 before falling back in the second half of the year. Given the backdrop described, we expect the BoE’s concern over higher inflation becoming entrenched to persist, which should lead to further policy-rate normalization and an underperformance of nominal and inflation-linked gilt yields.

© Western Asset Management Company, LLC 2024. The information contained in these materials ("the materials") is intended for the exclusive use of the designated recipient ("the recipient"). This information is proprietary and confidential and may contain commercially sensitive information, and may not be copied, reproduced or republished, in whole or in part, without the prior written consent of Western Asset Management Company ("Western Asset").
Past performance does not predict future returns. These materials should not be deemed to be a prediction or projection of future performance. These materials are intended for investment professionals including professional clients, eligible counterparties, and qualified investors only.
These materials have been produced for illustrative and informational purposes only. These materials contain Western Asset's opinions and beliefs as of the date designated on the materials; these views are subject to change and may not reflect real-time market developments and investment views.
Third party data may be used throughout the materials, and this data is believed to be accurate to the best of Western Asset's knowledge at the time of publication, but cannot be guaranteed. These materials may also contain strategy or product awards or rankings from independent third parties or industry publications which are based on unbiased quantitative and/or qualitative information determined independently by each third party or publication. In some cases, Western Asset may subscribe to these third party's standard industry services or publications. These standard subscriptions and services are available to all asset managers and do not influence rankings or awards in any way.
Investment strategies or products discussed herein may involve a high degree of risk, including the loss of some or all capital. Investments in any products or strategies described in these materials may be volatile, and investors should have the financial ability and willingness to accept such risks.
Unless otherwise noted, investment performance contained in these materials is reflective of a strategy composite. All other strategy data and information included in these materials reflects a representative portfolio which is an account in the composite that Western Asset believes most closely reflects the current portfolio management style of the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio shown may differ from other accounts in the composite. Information regarding the representative portfolio and the other accounts in the composite are available upon request. Statements in these materials should not be considered investment advice. References, either general or specific, to securities and/or issuers in the materials are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendation to purchase or sell such securities. Employees and/or clients of Western Asset may have a position in the securities or issuers mentioned.
These materials are not intended to provide, and should not be relied on for, accounting, legal, tax, investment or other advice. The recipient should consult its own counsel, accountant, investment, tax, and any other advisers for this advice, including economic risks and merits, related to making an investment with Western Asset. The recipient is responsible for observing the applicable laws and regulations of their country of residence.
Founded in 1971, Western Asset Management Company is a global fixed-income investment manager with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Zürich. Western Asset is a wholly owned subsidiary of Franklin Resources, Inc. but operates autonomously. Western Asset is comprised of six legal entities across the globe, each with distinct regional registrations: Western Asset Management Company, LLC, a registered Investment Adviser with the Securities and Exchange Commission; Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorized and regulated by Comissão de Valores Mobiliários and Brazilian Central Bank; Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services License 303160; Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services License for fund management and regulated by the Monetary Authority of Singapore; Western Asset Management Company Ltd, a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan; and Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority ("FCA") (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.