Market must refocus on inflation

Uncertainty about economic growth seems to have replaced inflation as investors' main concern, despite the fact that the Consumer Price Index (CPI) isn’t falling as fast as central banks had expected. Alberto Matellán, chief economist at MAPFRE Inversión, believes this is a mistake and that investors shouldn’t lose sight of rising prices, which are far more damaging to the economy than weak economic growth.

"Low growth is doing less social damage than inflation," Matellán points out, which is why the focus should first be on containing price rises. "Taking care of inflation first and growth second is the right way to go about it. Doing it the other way around means the benefits of improved growth are diluted by inflation."

As far as stagflation goes, the chief economist stresses that it, while not impossible, it’s usually a short-lived scenario, as weak growth drives prices down.

This week it was reported that the U.S. CPI in April came in at 4.9%, down from 5% in March. Matellán downplays the importance of whether the inflation rate is one tenth above or below the previous month: what’s important is the trend, which in turn determines the course of action taken by central banks. "A single data point on its own provides little information. What matters is the trend," he says.

Inflation in Spain is forecast to reach 2.6% in 2024, much closer to the target level of 2%. Matellán considers that level as viable, but recalls the volatility of these data, as they depend on variables such as energy and food prices, which fluctuate a lot.

This drop in the inflation rate in Spain may not be seen in other countries. This week the German CPI for April was also released, and stood at 7.2%, higher than in other countries such as Spain (4.1%). The European Central Bank (ECB) acts on the weighted average CPI across the eurozone, and not on a specific country, although Matellán acknowledges that some monetary policy may be too lax for some territories and too aggressive for others.

Is banking out of danger?

The European banking sector seems to have moved on from the turbulence experienced in March, when the collapse of Silicon Valley Bank (SVB) dragged down Credit Suisse, which was taken over by UBS.

Although it’s premature to say that European banking is out of danger, it is in a better situation than it was a few weeks ago, and also fares well when compared to U.S. banking scene. In addition, Matellán stresses that Q1 earnings were well received.

Optimistic on China

MAPFRE Inversión's chief economist maintains an optimistic stance on China, with consumption driving economic growth in the country, albeit less than expected.

"The Chinese cycle has been helped by the reopening and liquidity, but it’s not doing as well as expected, dragged down by credit and real estate issues," he says. Despite this slower momentum, Matellán believes that the downside will fade in the coming months and sees room for growth.