Unanimity Syndrome
If there is one thing apparently no-one believes to be possible, it is a resurgence of consumer price inflation. Actually, we are not expecting it to happen either. If one compares various ‘inflation’ data published by the government, it seems clear that the recent surge in headline inflation was largely an effect of the rally in oil prices from their early 2016 low. Since the rally in oil prices has stalled and may well be about to reverse, there seems to be no obvious reason to expect the increase in CPI to continue, or heaven forbid, to accelerate.
So-called ‘inflation expectations’ – which really means expectations about the future rate of change of CPI – have certainly risen following the US election, in expectation of a Trumpian spending spree and the possibility that higher tariffs might be imposed. This is to say, they have surged in terms of certain market indicators, such as inflation breakevens and forwards. Moreover, bond yields have certainly risen as well – as we expected them to do, since oil price-related base effects were bound to boost CPI (as we mentioned several times in these pages).
However, that obviously doesn’t mean that anyone believes rising consumer price inflation to represent a great threat, least of all an imminent one. This was brought home to us again shortly after the recent Fed rate hike, when a friend mailed us the following chart which was recently published at Zerohedge. It depicts the public’s medium term inflation expectations according to a regular consumer survey conducted by the University of Michigan. Ponder it carefully (the chart annotations are by ZH):
This post was published at Acting-Man on March 28, 2017.
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