US: High inflation, rising yields, repeat
The US Bureau of Labor Statistics will release US CPI-inflation data for December today at 13.30 London time.
Consensus forecast is for another set of record-breaking data but US CPI-inflation figures have been volatile since Spring 2021 and thus more difficult to accurately predict.
Our take is that US companies have been rapidly raising the prices they charge consumers, particularly for goods, because they have had to – as a result of rising input costs – and importantly because they have been able to without hurting their bottom line thanks to robust US consumer demand, particularly for goods.
Put differently it has both been a supply and demand-side problem, with some factors – including strong US wage growth – arguably feeding both sides of the equation.
We estimate that monthly core PCE-inflation, the Fed’s preferred measure of inflation, will have to have to halve from 0.44% mom in April-November 2021 to 0.22% mom over the next 13 months in order for the year-on-year rate to fall to 2.7% yoy by end-2022 – the Fed’s median forecast published in its 15th December Summary of Economic Projections.
The Fed arguably has little direct influence on PPI-inflation so the question of whether it manages to materially slow core PCE-inflation this year rests in part on its willingness and ability to cool consumer demand, in our view.
We argued in “Fed and US corporates in tussle over inflation” (12th November 2021) that higher US inflation in coming months would drag short-end Treasury yields higher and that where Treasury yields go other government bond yields tend to follow.
We maintain our view that the direction of travel for Treasury yields is likely to be upwards in coming months, with spikes in volatility, as recorded in mid-November (following the release of gangbuster October CPI-inflation data) and end-November, likely to remain a reasonably frequent occurrence.
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Olivier is an economist and rates & FX strategist with over 22 years experience in financial markets. He is Director and Founder of 4X Global Research, an independent, London-based consultancy which provides institutional and corporate clients with substantive research, high-quality analysis and insight on emerging and G20 economies and financial markets.