Inflation Worries Surface (in the US)

Summary:

  • US inflation concerns rise
  • Inflation expectations rise, as do commodities (including food)
  • Keep an eye out on Oil & Gas: crude oil stocks are shrinking fast
  • Value v Growth: Higher inflation expectations drive a Value rebound
  • Value sectors: Banks have reacted to higher bond yields
  • New weekly podcasts (apologies if you have already seen this!)

Inflation concerns surface in the US

The latest (January 2021) survey of US consumer inflation expectations reveals that they expect higher inflation ahead - in fact, January’s reading was the highest for 5 years. This is hardly surprising, given the sharp recovery in US retail gasoline prices from $1.87/gallon in late April to $2.59 this last week. Food prices are also significantly higher, up 3.8% from a year ago in January. Both energy and food prices are very visible to consumers, and are key in driving their inflation expectations.

US consumer inflation expectations jump to 5-year high

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Source: tradingeconomics.com

Similarly, the US bond market has priced higher medium-term inflation expectations in the difference between US Treasury bonds and inflation-protected US bonds (called TIPs). This measure of medium-term inflation expectations has recovered to above 2%, the highest such level since September 2018.

US inflation expectations bounce back above 2%

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Source: Bloomberg

A number of leading indicators suggest that this surge in inflation is not yet over - core Personal Consumption Expenditure prices (the preferred inflation measure that the Federal Reserve looks at) remain steady at 1.5% year-on-year, for now, but the prices component of the New York Empire State survey suggests a surge in USD core inflation ahead.

Empire State price index points to higher future US core inflation

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Source: Federal Reserve Bank of New York

Investors can gain exposure to rising inflation expectations via inflation expectations ETFs including one offered in the US by Proshares (RINF) and in Europe by Lyxor (INFU). These have already performed well since mid-2020, reflecting the rapid economic recovery and coincident recovery in inflation expectations.

US inflation expectations ETFs have already performed very well

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Source: tradingview.com

We know that rising inflation is generally bad for bonds, as they have a fixed coupon which is effectively eroded over time in real terms by higher inflation. It is hardly…

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