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

Caixin News, March 31 (edited by Liu Rui). As the fighting in Iran has failed to die down for a long time, international oil prices have remained high, geopolitical tensions have continued to intensify, and more and more investors can’t help but recall 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. But now, as fighting in the Middle East again triggers an energy crisis, will the nightmare of inflation make a comeback?

JPMorgan: The situation is different now

In response to investors’ concerns, the stock strategy team at JPMorgan refuted that the current macro backdrop is significantly different in multiple key respects.

They believe the most important difference is wages. In 2022, because the country was in the later stage of the COVID-19 pandemic, the labor market was distorted and wage growth accelerated sharply—this dynamic led to the Russia-Ukraine conflict resulting in persistent high inflation, and forced central banks into an aggressive tightening cycle.

“Currently, that is not the case; most wage data are trending downward,” JPMorgan strategists said, adding that in the current environment it is hard to see a wage-price spiral of inflation taking shape.

At the same time, central banks in different countries also have different policy stances. 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 regarded inflation as a temporary phenomenon.

Now, policy interest rates in different countries are roughly at their historical average levels, and after years of an inverted government bond yield curve, government bond yields have returned to historical average levels. Since the outbreak of the Iran war, the rates market has begun to expect the European Central Bank and the Bank of England to raise rates, but JPMorgan believes that “any rate hikes that are too early could be viewed as a policy mistake.”

On the consumer side, in 2022, because it was the later stage of the COVID-19 pandemic, consumers had strong suppressed demand that urgently needed to be released, and they also had ample cash on hand—this meant that although prices were soaring, consumer demand still remained strong. Businesses also had strong pricing power, enabling them to pass higher input costs on to consumers.

And now, “the situation is clearly different.” Strategists said.

In addition, the level of global economic activity is now much weaker than four years ago: growth momentum in the eurozone exceeded 4% at the start of 2022; it is now about 1%. Also, Europe’s energy infrastructure is more完善. Since 2021, the capacity of Europe’s LNG terminals has roughly doubled, and factors that exacerbated the energy crisis in 2022—such as severe supply shortages (like low coal inventories and the shutdown of French nuclear power plants)—have been reduced.

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

At present, concerns about artificial intelligence’s impact on employment are increasingly intensifying, and combined with the fact that sentiment in the labor market is already weak, this points more toward deflation outcomes rather than stagflation.

In its report, the JPMorgan team wrote that this “marks the ‘key difference’ between the stagflation argument and the deflation argument, and which one takes the dominant position.”

On stocks, strategists noted that European stock markets have fallen 11% due to changes in natural gas prices, but the actual change in European natural gas prices is only about one-quarter of that in 2022. This indicates that the market’s pessimistic sentiment triggered by this energy shock is far more severe than it was four years ago.

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责任编辑：郭建