Energy prices were supposed to contribute to the normalisation of prices in 2022. But Brent crude rose to the highest level since 2014 this morning. The rebound in oil prices is a sign that not everything will simply ‘normalise’.
Housing construction costs are a case in point: the RoMac Whole House Commodity Index was up 29.0% y/y this month, hitting a record high. But according to RoMac, this is not just a lumber story: prices are going up across-the-board.
A jump in energy prices could exacerbate the wage-price ‘spirals’ currently underway in select sectors of the US too. The sell-off in bonds could accelerate from here, particularly for 2- and 5-year Treasury yields. It is possible to argue that this will only hit growth stocks.
But the sharp rise in unit labour costs as witnessed in H2 2021 suggests margins will come under pressure across the economy. Firms in the 6th District are now planning wage increases in the region of 8% y/y.
Bond markets may also be factoring in additional risk premia for climate-related disruptions that could further affect supply chains. Last year was a good example, with adverse weather-related events pushing up prices.
