Is inflation a “tiger” or a “pussycat”? asks Gurpreet Narwan in The Times. Andy Haldane, the chief economist at the Bank of England, has warned that UK consumer price inflation will soon spike from its current level of 0.7% as the economy reopens. Haldane likened inflation to a “tiger” that has been “stirred by the extraordinary events… of the past 12 months”. It could prove “difficult to tame”. Not all of his colleagues agree. Deputy governor Dave Ramsden notes that UK inflation expectations (as measured by surveys) remain “well anchored” for now.
Bond markets totter
Concern about a more inflationary outlook rocked global bond markets last week. As bond prices fell, the US ten-year Treasury bond yield spiked towards 1.6%, a significant rise from the 0.9% level at which it started the year. The surge in yields hit stocks: higher bond yields prompt investors to sell shares and buy bonds. America’s tech-focused Nasdaq index plunged by 3.5% last Thursday, its worst one-day performance since October. The following day the FTSE 100 dropped by 2.5%.
The FTSE bounced back 1.3% on Monday, generating “a huge sigh of relief”, says Russ Mould of AJ Bell. Progress on Joe Biden’s $1.9trn stimulus bill (see page 10) soothed markets. Bond yields settled, with the US ten-year trading around 1.4%, calming fears that last week’s yield tantrum could precipitate an even larger rout.
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The bond yield spike shows that markets disagree with the US Federal Reserve about the economic outlook, says Eoin Treacy for fullertreacymoney.com. Fed chair Jerome Powell insists that the recovery is shaky, pointing to high US unemployment. That means interest rates will need to stay low for a long time. Investors, by contrast, increasingly think we are heading for a swift reflationary recovery. That would drive inflation higher and force the Fed to hike interest rates sooner rather than later.
Swinging back to the sixties
Expect more “turbulence”, says the Financial Times. Investors have grown so accustomed to ultra-low interest rates and quiescent inflation that even a modest shift to a “higher-rate, higher-inflation regime” could unleash “cascades of repricing” and “swingeing losses” for portfolios. “In truth, this is a good news story”; markets are anticipating a robust recovery and higher but not uncontrollable inflation. Inflation doves point out that massive quantitative easing (QE) after the financial crisis did not bring higher inflation, say Michael Bordo and Mickey Levy in The Wall Street Journal. But where that cash ended up as “excess reserves that sloshed around” the banking system, this time stimulus is far bigger and more direct – state cheques have been paid straight to US households.
“There is a long history of high budget deficits” heralding inflation; inflation began to tick up in the mid-1960s but governments on both sides of the Atlantic kept on spending, which led to crippling stagflation that blighted Western economies until the 1980s. It can be a surprisingly “short march” from low inflation back to high inflation.
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