Inflation, legislation and regulation: Sweeping U.S. budgets and EU proposals

On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Senior Client Investment Analyst Chris Kyle chatted about inflation, the proposed US$3.5 trillion U.S. budget, and the European Union plan to become carbon neutral by 2050.

More inflation talk in Washington

The conversation started with inflation, again. On Tuesday, U.S. inflation numbers notched a 5.4% year-over-year increase, based on June's Consumer Price Index. "The numbers certainly got Congress' attention," said Ristuben, explaining why Powell spent a few days explaining the numbers to both the U.S. House of Representatives and the U.S. Senate. "These are pretty eye-popping numbers." Ristuben noted that Powell's explanation agrees with our own thinking at Russell Investments, which is that the current sources of inflation are transitory, and that specific areas of the economy—car rentals, airlines, used car prices, energy—are being driven by the very low base of last June. "It's really actually adjusting from incredibly low levels to higher levels," said Ristuben. "You couldn't give away airplane tickets a year ago. Now they can. But they're not." Ristuben specifically called out widespread wage increases as a key indicator to watch. "We've seen those anecdotally. But if we see that in the system at a systematic level, that's a warning sign."

Big budgets proposed in the U.S.

A US$3.5 trillion budget was outlined by the democrats in the U.S. Senate this week. While its passage is far from assured, the potential breadth of impact is, as Chris Kyle said, "absolutely enormous."

Ristuben agreed: "It's pretty wide-sweeping. If you took the campaign agenda of Joe Biden and said, ‘We want to map that to a piece of budgetary legislation,' this is it." Ristuben also noted the potential tax implications. "We think the corporate tax [in the U.S.] is going to move to 25% from 21%. The target is 28, but we don't think they're going to be able to get that passed [U.S. Senator] Joe Manchin and his friends." Ristuben further explained that while the proposed budget has the backing of senate leadership and the president, it still needs to get through moderate Democrats and Republican opposition. Ristuben said: "It shouldn't be hugely surprising to people that they're proposing a budget that reflects the campaign agenda of the now-president of the United States. How much of it they can get through is a different question. And how they pay for all of this is yet another question. And those seem to be pretty open-ended at this point."

European Union climate-change blueprint aimed at corporate behavior

Chris Kyle noted that an equally remarkable blueprint for the future came from the EU this week, as announced by the European Commission. The blueprint lays out a plan for the EU to achieve carbon neutrality by 2050. Kyle stated that the scope is massive and that the blueprint is going to have geopolitical trade implications, impacts on fossil fuels and impacts on taxes.

"First thing, it's a blueprint," said Ristuben. "This isn't legislation that's been passed and certified. Probably a couple years of negotiation are going to go on. But I wouldn't expect massive step backs from what the proposal is. And it is sweeping." Ristuben postulated that the changes will impact energy producers, agriculture, the auto industry, airlines and numerous other industries. He explained that the blueprint will create an import levy—aka tariff—based on carbon credits. Any non-EU corporations will need to pay the tariff to level the playing field with regulated EU companies. According to Ristuben, "Trade tensions are likely to be created by the fact that it looks like there are tariffs being placed and not every country that does business with the euro is going to be thrilled about that." Ristuben observed that, in broader terms, regulations like these, with financial implications, tend to change the way companies operate. "Once your profits and revenues are affected by regulations and levies, then that tends to change corporate behavior." Erik noted that, "Those trends are occurring in the Unites States, too."

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