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
-
The shape of yields to comeCentral banks are likely to buy up short-term bonds to keep debt costs down for governments
-
The sad decline of investment clubs – and what comes nextOpinion Financial regulation and rising costs are killing off investment clubs that once used to be an enjoyable hobby, says David Prosser
-
Market predictions for 2026: Will Dubai introduce an income tax?Opinion My 2026 predictions, from a supermarket merger to Dubai introducing an income tax and Britain’s journey back to the 1970s
-
The steady rise of stablecoinsInnovations in cryptocurrency have created stablecoins, a new form of money. Trump is an enthusiastic supporter, but its benefits are not yet clear
-
Goodwin: A superlative British manufacturer to buy nowVeteran engineering group Goodwin has created a new profit engine. But following its tremendous run, can investors still afford the shares?
-
A change in leadership: Is US stock market exceptionalism over?US stocks trailed the rest of the world in 2025. Is this a sign that a long-overdue shift is underway?
-
Modern Monetary Theory and the return of magical thinkingThe Modern Monetary Theory is back in fashion again. How worried should we be?
-
Metals and AI power emerging marketsThis year’s big emerging market winners have tended to offer exposure to one of 2025’s two winning trends – AI-focused tech and the global metals rally
-
King Copper’s reign will continue – here's whyFor all the talk of copper shortage, the metal is actually in surplus globally this year and should be next year, too
-
The coming collapse in the jobs marketOpinion Once the Employment Bill becomes law, expect a full-scale collapse in hiring, says Matthew Lynn
