The US Federal Reserve is “running out of excuses” for high inflation, says James Mackintosh in The Wall Street Journal. US consumer prices rose by 6.2% year-on-year in October, the fastest rate since 1990. Core inflation, which excludes volatile food and energy prices, hit an annual 4.6%, the highest since 1991.
Bonds swoon
“I expect lots of eyeballs were bulging out of their sockets when they saw the number come in,” Seema Shah of Principal Global Investors told the BBC. Higher interest rates were not expected “before late 2022”, but the Fed now faces pressure to act sooner.
The inflation figure triggered a bond sell-off, with yields on two-year US Treasury bonds soaring “by the most since the market turbulence of March 2020”, say Kate Duguid and Naomi Rovnick in the Financial Times.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Investors appear to be betting that the Fed will have to tighten monetary policy sooner than expected. Market inflation expectations, measured by the ten-year break-even rate (the gap between yields on conventional bonds and inflation-protected ones), are at their highest level since 2006.
Stocks shrugged off the inflation news and continued to climb, says Jacob Sonenshine in Barron’s. One reason is that corporate profits have so far proven robust. Companies have been able to pass on price rises to consumers without losing sales.
Secondly, while bond yields have climbed, they are still well below the rate of inflation. With returns on bonds so dismal, investors have little choice but to keep pumping cash into the stockmarket.
Not so transitory after all
There has been a fierce debate this year between those arguing that inflation is transitory and those who see it as a more persistent threat, says The Economist. Central banks are in the former camp. They argue that pandemic-induced supply-chain problems will right themselves in time, and that tighter monetary policy will not solve problems such as energy shortages: US petrol prices were up by 50% over the past year.
But inflation has not ebbed. Indeed, the 4.6% rise in “core” prices suggests that inflationary pressures are spreading. Rising rents and wages in America threaten a “feedback loop” in 2022 as “higher salaries beget higher inflation”.
First, Fed policymakers said that “raging inflation” was just “catch-up for the deflation of last spring”, but prices are now high even compared to pre-pandemic levels, says Mackintosh. Then they said that it was caused by “a narrow set of Covid-19-disrupted supply chains”, such as semiconductors. Wrong again. Take away the “excuses” and the Fed’s policy amounts to “hope that inflation will go away by itself” next year. For now, investors are giving it the benefit of the doubt.
That might not last, says Liam Halligan in The Daily Telegraph. “Leading central banks stand or fall on their credibility”, but they are playing fast and loose with it: witness the Bank of England signalling a November rate rise that then didn’t materialise. If central banks lose the trust of markets, traders will “rebel, ignoring future signals, lurching through peaks and troughs, causing financial chao
-
High earners face £15k income hit by 2029 following Autumn BudgetRachel Reeves’s Autumn Budget means high earners – or HENRYs – are now looking at an income hit running into the thousands. Can you avoid it?
-
Millions underestimate how many paydays are left until retirement - why you should be counting your payslipsKeeping track of how long you will be earning a salary for can help work out how much you need to put into a workplace pension
-
Renewable energy funds are stuck between a ROC and a hard placeRenewable energy funds were hit hard by the government’s subsidy changes, but they have only themselves to blame for their failure to build trust with investors
-
The war dividend – how to invest in defence stocks as the world arms upWestern governments are back on a war footing. Investors should be prepared, too, says Jamie Ward
-
Did COP30 achieve anything to tackle climate change?The COP30 summit was a failure. But the world is going green regardless, says Simon Wilson
-
Rachel Reeves's punishing rise in business rates will crush the British economyOpinion By piling more and more stealth taxes onto businesses, the government is repeating exactly the same mistake of its first Budget, says Matthew Lynn
-
Leading European companies offer long-term growth prospectsOpinion Alexander Darwall, lead portfolio manager, European Opportunities Trust, picks three European companies where he'd put his money
-
How to capitalise on the pessimism around Britain's stock marketOpinion There was little in the Budget to prop up Britain's stock market, but opportunities are hiding in plain sight. Investors should take advantage while they can
-
London claims victory in the Brexit warsOpinion JPMorgan Chase's decision to build a new headquarters in London is a huge vote of confidence and a sign that the City will remain Europe's key financial hub
-
The consequences of the Autumn Budget – and what it means for the UK economyOpinion A directionless and floundering government has ducked the hard choices at the Autumn Budget, says Simon Wilson
