{"id":128176,"date":"2021-06-09T11:02:55","date_gmt":"2021-06-09T11:02:55","guid":{"rendered":"https:\/\/precoinnews.com\/?p=128176"},"modified":"2021-06-09T11:02:55","modified_gmt":"2021-06-09T11:02:55","slug":"column-inflation-warnings-are-mostly-just-in-case","status":"publish","type":"post","link":"https:\/\/precoinnews.com\/markets\/column-inflation-warnings-are-mostly-just-in-case\/","title":{"rendered":"Column: Inflation warnings are mostly 'just in case'"},"content":{"rendered":"

LONDON (Reuters) – As grandees of the investment world fall over themselves to warn of long-absent inflation up ahead, financial markets appear ever calmer about the risks of that new regime unfolding.<\/p>

Gas prices are seen after U.S. consumer prices surged in April, with a measure of underlying inflation blowing past the Federal Reserve’s 2% target, in Beverly Hills, California, U.S., June 2, 2021. REUTERS\/Lucy Nicholson<\/figcaption>

Is the post-pandemic inflation scare over already?<\/p>\n

Thursday will likely see the United States record the highest consumer price inflation rate in 13 years – just shy of 5% – and the fastest rate since 1993 if food and energy prices are cut out.<\/p>\n

Yet, bond and stock markets have been buoyant for weeks – seemingly comfortable with Federal Reserve signalling this is temporary and possibly even marking a peak of distorted \u2018base effects\u2019 measured against price falls as the pandemic hit a year ago. The past 12 months of COVID-related disruption has led to supply bottlenecks and jobs market distortions that may persist a little longer, but policymakers reckon these too will subside.<\/p>\n

Echoing that mantra from major central banks, the World Bank on Tuesday said the 1% jump in world inflation forecast for this year wouldn\u2019t warrant a policy change as long as inflation expectations stay under wraps. And U.S. market-based measures of these, although at their highest in years, have been slipping back for weeks – well below peaks over a month ago.<\/p>\n

Red-hot commodity markets, both affected by and also driving many of these base effects and bottlenecks, are showing signs of cresting too – or pausing at the very least.<\/p>\n

What\u2019s more, liquidity analysts argue massive annualised growth rates in money supply, central bank printing and fiscal spending in support of locked-down economies are already ebbing fast – another argument giving comfort we\u2019re already passing \u2018peak inflation\u2019.<\/p>\n

Yet, even if that\u2019s true, markets also seem impressively zen amid alarms raised over a more durable end to decades of structurally low inflation – due to anything from changing demographics, retreating globalisation, shifting central bank mandates and even the purge on carbon to fight climate change.<\/p>\n

That\u2019s a lot of cogent inflation arguments to face down – complicating the puzzle and raising a question about whether calls for \u201cThe Great Reflation\u201d, \u201cNew Nominal\u201d or \u2018Roaring Twenties\u201d are already the overwhelming consensus and priced.<\/p>\n

Some investors reckon it\u2019s simply to early to tell and markets are reluctant to bet the farm yet on an unprecedented horizon impossible to predict with any accuracy.<\/p>\n

\u201cThere should be a dramatic pause here. Because no one knows,\u201d said Jim Wood-Smith at Hawksmoor Investment Management, adding few market or investment professionals now working have seen anything other than falling inflation expectations for much of the past 4 decades.<\/p>\n

And if that\u2019s an honest appraisal of the doubts, it makes little sense for central banks to rush to pull the plug now – having equated their policy support to a war footing dealing with the biggest shock to global economy since the 1940s.<\/p>\n

HEADS OR TAILS?<\/h2>\n

For all their eye-catching red flags, investment banks are just hedging their bets to some degree.<\/p>\n

Deutsche Bank\u2019s economists this week said their central scenario was that the inflation resurgence would be temporary and benign. But in a new series dubbed \u201cWhat\u2019s in the tails?\u201d they said they felt compelled to warn about the chance their forecasts are wrong.<\/p>\n

\u201cWe are witnessing the most important shift in global macro policy since the Reagan\/Volcker axis 40 years ago,\u201d Deutsche\u2019s David Folkerts-Landau, Peter Hooper and Jim Reid wrote, adding the fear is the Fed\u2019s new inflation averaging target will make it too slow act if necessary, leading to later and harsher tightening and a deeper recession with debt distress.<\/p>\n

\u201cIt is a scary thought that just as inflation is being deprioritised, fiscal and monetary policy is being coordinated in ways the world has never seen,\u201d they said. Given the scale of debt accumulated during the pandemic, \u201cneglecting inflation leaves global economies sitting on a time bomb.\u201d<\/p>\n

Others already have a new inflation regime as a base case.<\/p>\n

Pascal Blanque, chief investment officer at Europe\u2019s biggest asset manager Amundi, last week restated his central belief that we are heading \u201cback to the 1970s\u201d in terms of supply shocks seeding a mix of inflation and spluttering growth and much higher volatility in interest rates.<\/p>\n

One of the reasons he claimed is the public, political and policymaking desire for higher inflation.<\/p>\n

Larry Fink, chief executive of the world\u2019s biggest asset manager BlackRock, also struck a 1970s theme by warning inflation may result from yet another massive energy-related disruption and asked whether people would accept that now as a price for rushing an exit from carbon.<\/p>\n

\u201cIf we rush this and if our solution is entirely just to get a green world, we\u2019re going to have much higher inflation, because we do not have the technology to do all this yet to have it equivalent to the cheapness of hydrocarbons,\u201d he said.<\/p>\n

However, \u2018ifs\u2019 and \u2018buts\u2019 are not forecasts. And sub-2.5% inflation expectations over 5- and 10-year bond market horizons show that current CPI prints are still seen as a blip over time.<\/p>\n

Morgan Stanley, for one, talks of U.S. CPI undershooting already elevated consensus forecasts over the next three months, advising clients to \u201cfade the hysteria\u201d and warning that below-forecast inflation could well be the \u2018pain trade\u2019 of the year.<\/p>\n

Source: Read Full Article<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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