Inflation watch

Macro 8 minutes to read
Eleanor Creagh

Australian Market Strategist, Saxo

Summary:  Survey data points to higher inflation driving bond yields upwards, we discuss.


The initial impact of the crisis has been disinflationary, in official price indices at least. Beyond that however, change is afoot, and we see increasing capacity for inflationary pressures to emerge in official measures over the next 12 months, particularly against incoming low base effects, in turn pushing longer-dated bond yields higher.

Supply chain bottlenecks, raw materials prices, food prices, and soaring freight shipping costs all point to inflationary pressures on the supply side that are already here.

ISM Prices

A lot of survey data is confirming these significant cost increases. ISM’s January index of prices paid for raw materials is at the highest level since April 2011, pointing to building price pressures in the US manufacturing industry and signalling much higher inflation ahead.

“We are seeing significant cost increases in logistics and raw materials.” (Machinery)

The Prices Index registered 82.1%, up 4.5 percentage points compared to the December reading of 77.6%, signalling headline inflation could rise above 3% in the year ahead. All 18 industries surveyed reported paying increased prices for raw materials in January.

China PPI

China’s producer price index is another indicator of price pressures creeping through the system. The producer price index rose 0.3% from a year earlier, and 1% from the prior month. Increases in prices across almost the entire commodity complex, from copper, coal and oil to battery metals and rare earths, is buoying factory gate prices and China will soon start exporting those inflationary pressures to the rest of the world.

As commodities continue to inflate, PPI inflation will build, likely feeding through to consumer prices (or margin pressures) outside of China.

Inbound inflationary pressures set to be exported elsewhere will continue to add to the ongoing rally in commodities. Chinese producer prices have returned to inflation and supply price pressures are set to be passed on. Although 1 month’s data does not confirm the new trend, in combination with price pressures and supply chain bottlenecks visible across global manufacturing it is fair to say inflation pressures are clearly building. These cost rises will eventually become visible in headline CPI rates. 

Empire survey

The prices index is soaring higher, corroborating the trend seen in other survey data. Both prices paid and received are each at their highest levels in nearly 10 years.

Food inflation

The global food inflation seen over the past year is here to stay. With the highest corn and soybean prices in 7 years, farmers are being squeezed, particularly those feeding cattle, hogs and poultry. Some reporting that the cost of raising there herds has inflated more than 30%.

Producers like Tyson foods are already increasing prices, which will exert upward price pressure through supply chains in the year ahead.

Price pressures are clearly building. The bond market is responding to these repeated inflationary reads, and will continue to do so, with the 10yr yield continuing to breakout hitting new cycle highs and yield curves steepening.

Coupled with demand side pressures coming from the profound shift toward fiscal primacy – aimed at securing jobs, reinvigorating demand, and fighting inequality - by most Western economies, we have almost a perfect storm for higher inflation. Money printing aimed at demand generation is inherently more inflationary than asset purchases. Money is heading straight to the pockets of those with the highest marginal propensity to spend. Under the banner of this social stability agenda, exacerbated by the pandemics K shaped recovery dynamics, policy makers are willing to take a risk on inflation.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Support Centre
For existing clients, please click here to request support via the Support Centre.

Have a question about our products, platforms or services? Visit the Support Centre to find answers for our most frequently asked questions. If you are still unable to locate an answer to your question, you will also find contact details for your local Saxo office to speak with a representative.

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.