With nearly $3 trillion in lending from the Fed this year, and Congress approving $900 billion in debt-financed spending on top of the $3.1 trillion budget deficit in fiscal year 2020, inflation hawks are sounding the alarm.
Why it matters: “Inflation staying low and well-behaved is the foundation on which everything in markets is currently priced,” Karen Ward, chief market strategist for Europe at JPMorgan Asset Management, told FT.
- “Investors’ assumption is that central banks will be able to stay accommodative well into the economic recovery. If inflation picks up in a way that’s not expected, that would challenge the market’s entire view.”
The big picture: Most major asset managers are predicting a significant return to growth for the U.S. economy next year, but some worry the release of pent-up demand - as mass vaccinations end the coronavirus pandemic's depressing hold on prices - will lead to a return of inflation.
What's happening: Indicators already have been perking up, with inflation in "pandemic products" spiking (world food prices rose at the fastest rate in six years last month), even as official metrics like consumer price indexes have shown no reason for worry.
- Precious metals' prices are rising again, with gold touching its highest level since early November late last week and silver on a six-session winning streak, hitting its highest since Sept. 22 on Monday.
- Five-, 10- and 30-year breakeven inflation rates are all rising near 2% and the 10-year rate, at 1.95%, is just 2 basis points from its highest point since November 2018.
- U.S. money supply, M2, continues to rise at breakneck speed.
The intrigue: "How concerned should we be?" Bank of America's global economics team wrote in a note to clients. "With low inflation woven into the fabric of capital markets, significantly higher inflation today could be more even more painful than in the past."
Yes, but: BofA analysts echoed the sentiments of most Wall Street strategists and fund managers saying they "expect many inflation head fakes before the real deal arrives."
One level deeper: "The trajectory for inflation will be a lively debate, with the vaccine-driven reopening of the economy likely to trigger a jump in prices for items at the epicenter of the pandemic," Deutsche Bank chief U.S. economist Matthew Luzzetti said in a note.
- "However, we anticipate that any price pressures triggered by these events will prove transitory and that ultimately the disinflationary pressures from shelter and health care will keep inflation subdued."
Yes, but, but: The Fed has pledged not to raise U.S. interest rates until inflation has run above its 2% target for some time. That risks letting rising prices get out of hand, economists warn.