Watch out: US inflation is on the way

The Federal Reserve has plenty to worry about, says Andrew Van Sickle. But it seems to have overlooked rising prices.

Was that it? Since mid-February, global stockmarkets have found their feet and made up most of the losses suffered since the beginning of the year. In the corporate bond market, the return of "risk-on" sentiment has prompted a particularly sharp fall in the yields on offer on American junk bonds, which have slid from an average 8.4% to 6.6% in just three weeks, as prices of the bonds have rebounded (prices and yields move inversely to one another).

Investors appear to be getting over their growth-and-deflation scare, which saw worries over a possible economic slump in China and a recession in America expressed through, and reinforced by, plunging commodities prices. It is apparent that China will do what it takes to keep the show on the road and the latest data in America have allayed fears of a downturn. Last week's US employment report was the latest sign that "if you were pricing this thing for recession, you've got to take it back out", as Wells Capital Management's Jim Paulsen puts it.

February was an unusually strong month, with payrolls growing by 22,000 and the unemployment rate steady at a post-crisis low of 4.9%. The healthy labour market is key to consumption, the main driver of US growth, says Unicredit's Harm Bandholz in the FT. So "the various headwinds on the Federal Reserve's radar screen", such as a lacklustre global environment, shouldn't derail the US recovery.

One thing that isn't on the Fed's radar screen but should be is US inflation. "Inflationary forces are broadening and accelerating, and it is happening fast," says Ben Lord of M&G on BondVigilantes.com. As recently as October, annual consumer price inflation was running at 0.1%; now it's 1.4%. The core PCE, a gauge of inflation the Fed tries to keep at 2%, is at 1.7%, while core CPI is at a four-year high of 2.2%.

Note too, says Lord, that annual price increases in the services sector are running at 2.5% a year. Goods prices are on the rise, despite the strong dollar. "Rental costs continue to be a source of rising prices and medical costs are showing signs of life." And all this before the oil-price slide drops out of the annual comparison.

The upshot? It may not be too long before markets start to worry that the Fed is behind the curve and may have to raise interest rates faster and further than expected hardly good news for overpriced, liquidity-addicted asset markets. Forget the growth scare we may soon see an inflation panic.

Recommended

Is US inflation accelerating again? Figures suggest the Fed has further to go
US Economy

Is US inflation accelerating again? Figures suggest the Fed has further to go

The latest US inflation figures suggest inflation is not falling as fast as analysts had predicted. It could even be speeding up again.
14 Feb 2023
Federal Reserve raises interest rates by 0.5%
US Economy

Federal Reserve raises interest rates by 0.5%

The latest hike by the Federal Reserve takes the US benchmark rate to 4.25% - 4.5%.
15 Dec 2022
US stimulus checks – will you get one?
US Economy

US stimulus checks – will you get one?

To help fight high inflation and financial hardships, some US states have started to send stimulus checks to support residents. Here’s what you need t…
14 Nov 2022
US inflation drops to 7.7%
US Economy

US inflation drops to 7.7%

Costs for rents increased, but the price of cars, clothes and medical care helped slow the rate of inflation in the US
11 Nov 2022

Most Popular

5 top UK tech stocks
Investments

5 top UK tech stocks

The UK market has never been considered a fertile hunting ground for tech stars. But there are plenty of promising companies beyond the old economy, s…
23 Mar 2023
Where will house prices go in 2023?
House prices

Where will house prices go in 2023?

We explore what could happen to house prices in 2023 as the market continues to slow down.
24 Mar 2023
Will energy prices go down in 2023?
Personal finance

Will energy prices go down in 2023?

Ofgem’s price cap is now predicted to fall below £2,000, based on average typical use, from July, for the first time since 2022. We have all the detai…
21 Mar 2023