Dec 4, 2020 - Economy

U.S. markets brace for possible inflation spike

Data: ISM; Chart: Axios Visuals
Data: ISM; Chart: Axios Visuals

A spate of recent U.S. economic data releases suggest that inflation could be making a major comeback.

Driving the news: Thursday's report on the U.S. services sector for November from the Institute for Supply Management was slightly better than expected but still down from October's reading, however, the bigger story was in the prices paid index.

What happened: Prices paid jumped to its highest level since early 2012, rising for the second straight month and coming in above 60 for the third month in four and fourth month in six.

  • Prior to June, the prices paid index hadn't risen above 60 since November 2018.
  • The increase in services prices has come in concert with increasing manufacturing prices. ISM's manufacturing prices paid index has been above 60 for each of the past three months (October through December) after not hitting 60 since December 2018.
  • A reading above 50 indicates that prices are increasing.

Why it matters: A return of inflation would put the U.S. economy in a precarious position, especially with the renewed rise in COVID-19 diagnoses and the still weak job market.

  • The Fed is holding interest rates down to help spur economic activity but could be forced to choose between the need to rein in inflation and the need to assist the economy.

Yes, but: Some economists have been incredulous about rising inflation, given the deflationary impact of the coronavirus pandemic.

  • "Just a reminder that one off shifts in prices (goods vs services >> services vs goods) do not an inflation process make," MacroPolicy Perspectives president Julia Coronado wrote on Twitter.
  • "Inflation is steady increases in a broad set of prices underpinned by steady gains in consumer purchasing power. Thank you for coming to my Ted talk..."

Yes, but, but: Closely followed inflation metrics are reacting just the same — 5-year, 10-year and 30-year breakeven inflation rates have climbed all week, hitting fresh highs every day since Tuesday that date back to May 2019.

  • The 5-year, 5-year forward inflation expectation rate rose to 1.94% Thursday, the highest its been since July 2019.
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