Although the move higher in long dated yields in the US has stabilised since our last Inflation Watch update there is no shortage in inflationary reads and pricing pressures across various survey data. Eurozone yields have picked up the baton and are pushing higher and as the growth backdrop continues to improve alongside strengthening inflation expectations UST yields will soon follow suit, resuming their march higher toward 2%.
The good news continues to roll in for growth with a slew of positive economic data delivered in recent weeks. Granted favourable base effects are playing their part in the year over year acceleration in the data (and will continue to do so) but on some measures 2019 levels are being surpassed. All told the economic cycle continues to accelerate which remains the driving force propelling equity markets in the near term.
However, once that rate of change turns, focus will likely shift to the impact of rising input costs and widespread price pressures and the prospect taxes hikes – likely a more difficult period to navigate. Remember, everything happens at the second derivative!
Rising PPI inflation in China could drive US CPI inflation materially higher and is another indicator of price pressures. Through March the China producer price index rose 4.4% from a year earlier, and 1.6% from the prior month.
Base effects have contributed to this move higher but are not the full story. Increases in prices across almost the entire commodity complex, from copper, coal, and oil, to battery metals and rare earths, is hitting factory gate prices. The impact of increased prices across the commodity complex will continue to flow through to PPI over the coming months, as will base effects continue to contribute to higher PPI reads. As the effect of increased commodity prices continues to flow through to PPI inflation we could see this number heading toward 10% in the coming months.