The Feb US CPI read showed benign inflationary pressures, the core rising just 0.1% versus an expected 0.2% m/m, but this is the last of the higher base effects.
Against incoming easier comparisons and Covid-fatigued consumers that are vaccinated and ready to spend, inflation will soon be a lot higher. Transfers have bolstered incomes, the labour market is rebounding, savings are elevated and US household spending expectations are at a 4-year high. This increase in demand will quickly meet supply constraints and rising input costs.
Following the enactment of the latest COVID-19 relief bill, on average the poorest quintile of households will see annual incomes boosted ~20%, generating an increased capacity to consume for those with the highest marginal propensity to do so. Framing this against the backdrop of a structural shift toward fiscal dominance, we will see significantly higher spending and transfers to the individual bringing a lasting step-up in consumption, compounding supply constraints. That is why we see a pivotal regime change in interest rates/inflation, supercharged by the new era of fiscal dominance, green transformation and supply constraints. Using linear CPI models from a regime characterised by secular stagnation is not going to cut it with these drivers in play.
From semiconductor chips to copper, demand is on the rise while capacity remains constrained. We have underinvested in the production capacity required to meet accelerated digital adoption, green transformation and the recovered spending capacity that comes with this seismic fiscal shift.
Markets have recognised this to some extent and breakevens are on the rise, but inflation will more than “moderately overshoot” based on our methodologies, which is not sufficiently discounted yet. The continued lift in commodity prices, supply constraints, China PPI, ISM price gauges, and Empire State Manufacturing Survey’s along with other global PMI’s are all signalling 3% US CPI could be chip shot against low base effects. This maintains upwards pressure on yields given the regime change in interest rates/inflation being turbocharged by the new era of fiscal dominance, green transformation and supply constraints. Already a lot of the alpha generated YTD has been in response to a global reflationary cocktail and nascent inflation pressures, as the year progresses it will be increasingly important to be on the right side of these trends. Higher inflation, commodities, cyclicals, and higher rates.
Source: Bloomberg and Saxo Capital Markets
US Manufacturing Inflation Pressures
Empire State Manufacturing Survey - Input price increases continued to pick up, rising at the fastest pace in nearly a decade, and selling prices increased significantly.
US ISM Manufacturing PMI - Price pressures building. The survey's measure of prices paid by manufacturers jumped to a reading of 86.0, the highest since July 2008. Raw materials prices increased for the ninth consecutive month.
“Prices are rising so rapidly that many are wondering if [the situation] is sustainable. Shortages have the industry concerned for supply going forward, at least deep into the second quarter.” (Wood Products)
“Things are now out of control. Everything is a mess, and we are seeing wide-scale shortages.” (Electrical Equipment, Appliances & Components)
“We have seen our new-order log increase by 40 percent over the last two months. We are overloaded with orders and do not have the personnel to get product out the door on schedule.” (Primary Metals)
US ISM Services - Measure of prices paid jumps to highest level since 2008.
“Suppliers are taking the opportunity with the commodity-price increases in the last few months to propose price increases that are above and beyond normal expectations, causing significant concern. “ (Accommodation & Food Services)
“Price increases are occurring with more frequency for products containing raw materials such as copper and steel.” (Retail Trade)
Rising PPI inflation in China could drive US CPI inflation materially higher and is another indicator of price pressures. Through February the China producer price index rose 1.7% from a year earlier, and 0.8% 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. China will soon start exporting those inflationary pressures to the rest of the world. An uptick in factory gate prices in China has historically held a close relationship with US headline CPI. As supply side bottlenecks build, demand picks up and input prices continue to move higher, output prices will follow.
Global Manufacturing Inflation Pressures
Eurozone PMI - Inflationary pressures as input prices rose at the fastest pace since 2011
JP Morgan Global Composite PMI (compiled by IHS Markit) - Price pressures hit 12½ year high. Survey respondents report that inflationary pressures are rising, with the global manufacturing sector facing supply chain disruption, delivery delays and rising cost pressures.
South Korea Manufacturing PMI - Price gauges hit new peaks. Supply shortages and shipping delays drive survey record rise in prices.
Taiwan Manufacturing PMI - Input costs continue to rise sharply, leading to higher.
India IHS Markit PMI - India's manufacturing sector remained steady despite cost inflation pressures.