Here are four worrying signs that inflation may persist, from a bond fund manager

Here are four worrying signs that inflation may persist, from a bond fund manager

What last week’s consumer prices and then Tuesday’s producer price index data both show is that the market was pricing in more bad news on the inflation front than of relief, and therefore large short cover rallies when the data is weaker than expected.


This graph from Societe Generale clearly shows that the biggest winners of the miss CPI were the biggest losers of the year.

Federal Reserve officials were quick to rain down on this parade, but why believe them anyway? They certainly did not see the wave of inflation coming, and even if they saw inflation receding, they had every interest in not proclaiming it soon. It is therefore up to the financial markets to determine what the inflation data contains and how the Fed will eventually react.

Carlo Putti, director of bond investors at fund manager M&G, admits there has been some good news on the inflation front. But it also still highlights some worrying signs.

The first is that inflation is now generalized. This is best illustrated in the Cleveland Fed’s Median CPI report, which shows components with spending weights in the 50th percentile of price changes. In October, this reading was 7%, corresponding to the highest level of the cycle.

M&G/Cleveland Fed

The second is that the sticky elements of inflation are on the move. Basically, that means services, not goods, and services inflation doesn’t tend to be as volatile. “As a result, we may not see a sharp deceleration in inflation any time soon,” he says.

Another point is that salaries have increased this year – a particularly important input for services. “If wage growth remains high or even picks up from here, there is potential for more inflationary surprises in the future. Keep an eye on wages and a possible wage-price spiral, because it could completely change the inflation picture for next year,” says Putti.


Finally, he notes that the velocity of money – defined in this case as the M2 measure of money supply divided by nominal GDP – is on the rise. “Higher rates generally increase velocity as consumers look for opportunities to deploy their money. Recently we have seen an acceleration in the velocity of money. If this continues, inflation could remain elevated even as the mass monetary fall,” Putti said.

The steps

US Equity Futures ES00

bowed lower before the opening bell. The 10-Year Treasury Yield BX:TMUBMUSD10Y
fell to 3.73%. The DXY Dollar

The buzz

US officials are of the opinion that the missile that hit Poland was likely launched by Ukrainian air defense rather than Russia, so World War III is at the very least delayed.

Retail sales jumped 1.3% in October, boosted by both gas station sales and restaurant and bar activity.

Lowe’s weak
raised its profit forecast for the year, while Target TGT
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slumped after its third-quarter numbers.

Manufacturer of networking equipment Cisco Systems CSCO
and graphics chip maker Nvidia NVDA
report after closing.

Donald Trump has said he is running for president again, although this time around he may face tougher Republican opposition.

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