MacroResearchBoard

U.S. Inflation: Will Higher Lows Translate Into Higher Highs? – June 7, 2021

The number one macro force that could potentially disrupt the strongest period of economic growth in many decades and undermine booming global financial markets, would be if inflation finally returned after a long period of undershooting central bank’s targets.

A just-published report provided an assessment of the inflation outlook, with a focus on the U.S. economy which should lead the uptrend in global inflation pressures. Our examination of the forces driving consumer price inflation on a cyclical and longer-term basis showed that almost all are currently contributing to higher price pressures. The Fed and many investors believe that this will prove “transitory”. Our assessment suggests otherwise.

Although the current post-pandemic spike in U.S. core inflation will soon crest, we anticipate that it will be followed by resilience, rather than a return to sub-2% inflation. The underlying inflation uptrend will be gradual but resilient, which should become evident later this year and in 2022, as the primary influence shifts from cost-push to demand-pull inflation. This, in turn, should lead to another upleg in government bond yields and increased volatility across all risk asset markets. Stay tuned.