Column: Inflation warnings are mostly “just in case”

© Reuters. Gas prices are seen after U.S. consumer prices skyrocketed in April in Beverly Hills, California, United States, on June 2, 2021, with a measure of underlying inflation surpassing the Federal Reserve’s 2% target . REUTERS / Lucy Nicholson

Posted by Mike Dolan

LONDON (Reuters) – As the grandees of the investment world raid themselves to warn of a long absence of inflation in the future, financial markets seem increasingly calm given the risks of this new regime.

Is the fear of inflation already over after the pandemic?

On Thursday, the United States is likely to see its highest consumer price inflation rate in 13 years – just under 5% – and the fastest rate since 1993 if food and energy prices are cut.

Still, bond and equity markets have been buoyant for weeks – apparently with the Federal Reserve’s signaling that this is temporary and possibly even marking a peak of biased “base effects” measured against the falls when the pandemic erupted a year ago. The COVID-related disruptions over the past 12 months have created supply bottlenecks and distortions in the labor market that may last a little longer, but policymakers believe these will also ease.

Following this mantra of the major central banks, the World Bank said on Tuesday that the 1% increase in the global inflation forecast for this year would not warrant a policy change as long as inflation expectations remain under wraps. And the US market-based measurements for this, although they have reached their highest level in years, have been declining for weeks – well below the highs over a month ago.

The red-hot commodity markets, which are both affected and driven by many of these base effects and bottlenecks, are also showing signs of recovery – or at least a pause.

In addition, liquidity analysts argue that the massive annualized growth rates in money supply, central bank pressures and government spending to support frozen economies are already easing – another argument that comforts that we have already passed “peak inflation”.

But even if that’s true, the markets seem impressively censored amid alarms of a more permanent end to decades of structurally low inflation – due to changes in demographics, declining globalization, changing central bank mandates, and even reductions in CO2 to combat the climate Change.

There are a lot of sound inflationary arguments to be refuted – which complicates the puzzle and begs the question of whether calls for “The Great Reflation”, “New Nominal” or “Roaring Twenties” are the overwhelming consensus and price.

Some investors feel that it is simply too early to say and the markets are reluctant to bet on the farm, but with an unprecedented horizon that cannot be predicted with accuracy.

“This should be a dramatic pause because nobody knows,” said Jim Wood-Smith of Hawksmoor Investment Management, adding that few market or investment professionals have seen anything other than falling inflation expectations in the past four decades.

And if that’s an honest appraisal of the doubts, it makes little sense for central banks to pull the plug now – after equating their political support with a war base that has caused the biggest shock to the global economy since the 1940s.

HEAD OR NUMBER?

Despite all of their flashy red flags, investment banks only hedge their bets to a certain extent.

Deutsche Bank The (DE 🙂 economists said this week their central scenario is that the inflation resurgence would be temporary and benign. But in a new series called “What’s in the tails?” They said they felt compelled to warn of the possibility that their predictions are wrong.

“We are experiencing the most important change in global macro politics since the Reagan / Volcker axis 40 years ago,” wrote David Folkerts-Landau, Peter Hooper and Jim Reid of the German, adding that the Fed’s new average inflation target will make it too act slowly if necessary, which will lead to a later and more severe deterioration and a deeper recession with a debt crisis.

“It’s a scary to think that financial and monetary policies are being coordinated in ways the world has never seen before while inflation is coming down. Given the size of the debt accumulated during the pandemic, “if you neglect inflation, the world economy is on a time bomb”.

Others already have a new inflation regime as a base scenario.

Pascal Blanque, Chief Investment Officer at Europe’s largest asset manager Amundi, reiterated his core belief last week that we are “going back to the 1970s” for supply shocks, which are a mixture of inflation and stuttering growth and much higher interest rate volatility .

One of the reasons he claimed was the public, political and political desire for higher inflation.

Larry Fink, chairman of the board of the world’s largest wealth manager BlackRock (NYSE :), also brought up a 1970s issue by warning that inflation could result from another massive energy disruption and asking if people now use this as the price to pay for a hasty exit would accept from carbon.

“If we rush this and our solution is solely to create a green world, we will have much higher inflation because we don’t yet have the technology to do all of this to make hydrocarbons cheap. ” he said.

However, “if” and “but” are not predictions. And inflation expectations below 2.5% over 5 and 10 year bond market horizons show that current CPI values ​​are still seen as slip-ups over time.

Morgan Stanley (NYSE :), on the one hand there is talk that the US-CPI will fall below the consensus forecasts that have already been raised in the next three months, advises customers to “fade the hysteria” and that inflation below the forecasts is definitely the “pain trade “Could be of the year.

(by Mike Dolan, Twitter: @reutersMikeD)

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