Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Waiting For The Inflation Canary To Sing… Or Not

By James PicernoMarket OverviewApr 29, 2021 07:49AM ET
www.investing.com/analysis/waiting-for-the-inflation-canary-to-sing-or-not-200576274
Waiting For The Inflation Canary To Sing… Or Not
By James Picerno   |  Apr 29, 2021 07:49AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

The Federal Reserve reports that it expects faster economic growth and higher inflation—two factors that historically have triggered tighter monetary policy. But the Fed is playing a different game this time and announced on Wednesday that it will keep interest rates near zero. Depending on your macro outlook, this is either hopelessly naïve or a clear-eyed view of looking through what some anticipate will be reflationary noise for the next several months.

In time, perhaps as early as the second half of the year, the inflation numbers will determine if Fed Chair Powell and company are prescient or reckless. Here’s a short list for monitoring the incoming data.

Core Inflation

The first order of business is keeping an eye on core inflation measures. Consumer price data is among the earliest hard-data series published each month and so this is an obvious place to focus. Why core? Because it offers a more reliable measure of the trend. The short-term headline inflation metrics can and do deviate sharply, up and down, from core readings, but history strongly suggests that focusing on core numbers helps minimize noise and boost signal.

On that front, two data sets deserve close attention: annual changes to the core Consumer Price Index and the Sticky Price Consumer Price Index less Food and Energy—two efforts to capture a robust measure of the inflationary trend. In both cases at the moment, this pair continues to reflect modest inflation pressure that’s running below an annual 2% pace through March—well below the Fed’s 2% target. Inflation is expected to pick up in the months ahead, but the question is whether we’ll see more than a temporary bounce due to base effects brewing? If these core readings move close to 3% and stay there (or run higher), the case will significantly strengthen for worrying that the Fed has let the inflation cat out of the bag.

Sticky Price Consumer Price Index
Sticky Price Consumer Price Index

Treasury Market Expectations

A key question for monitoring inflation risk: Is the Treasury market pricing in temporary reflation or a sustained, substantial increase in inflation? So far, the case for reflation is persuasive on this front. Although the market’s implied inflation forecast (based on nominal less inflation-indexed yields) has rebounded sharply since last year, to date the revival has more or less returned expectations to pre-pandemic levels—roughly the 2.5% range and seems to be holding in this range. If expectations shoot substantially higher—above 3%—that would be a sign that the market is concerned that inflation is becoming a significant risk factor. Meantime, the jury’s out. Note, too, that the 10-year forecast is below the 5-year estimate, which implies that the market is projecting that inflation will moderate after a period of running hotter. If the 10-year forecast runs above the 5-year estimate, that would signal expectations are pricing in a more sustained run of higher inflation.

10 Yr - 5 Yr Breakeven Inflation Rate
10 Yr - 5 Yr Breakeven Inflation Rate

Commodities Prices

The commodities markets are also sensitive to inflation expectations and at the moment this signal is reflecting a reflationary run. But the comparison with last year’s temporary bout of deflation makes recent comparisons misleading. The S&P GSCI Commodity Index is up sharply from year-ago levels, but to date the gain is more about bouncing off of pandemic lows. If commodities continue to rise, however, this would be one more clue for thinking that inflation’s rise is more than temporary. With that in mind, S&P GSCI Commodity Index approaching the 3000 level (vs. 2425 currently) would signal that the commodities market is expecting higher inflation will be persistent.

GTX Weekly Chart
GTX Weekly Chart

Wages

A key input for inflation is higher wages. One measure in this corner has recently shot higher, providing inflationistas with support for arguing that regime shift is brewing. But wage inflation has cooled recently, based on the annual pace for average hourly earnings for private-sector employees. The current 4.2% year-over-year gain is relatively high compared with previous years (before the latest surge). But after the latest spike, wage inflation appears to be reversing. The path in the months ahead for this indicator will be a key factor in shaping the outlook for inflation in the second half of the year and into 2022.

Average Hourly Earnings For Private Sector Employees
Average Hourly Earnings For Private Sector Employees

Waiting For The Inflation Canary To Sing… Or Not
 

Related Articles

Waiting For The Inflation Canary To Sing… Or Not

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email