Keeping an Eye on Inflation

Return to Calmer Waters

After January’s US inflation scare that sent jitters across markets and caused ripples all the way to Asia – it looks like markets are making its return back to calmer waters. US consumer prices held steady in February, soothing investor’s concerns over any sudden spike in inflation that would trigger an acceleration of the pace of interest rate hikes by the US Federal Reserve.

The US consumer price index (CPI) rose 2.2% in the 12 months through February, compared with 2.1% in January, whilst core CPI was up 1.8% from a year earlier for a third month.

As inflation gradually firms up to the Fed’s inflation target, markets have now repriced asset prices in terms of inflationary expectations, where after years of loose monetary policy and quantitative easing (QE) programmes have finally resulted in an uplifting of growth.

Markets were only priced-in for 2 rate hikes by the Fed at the start of the year, before we saw markets sold-off on the back of strong inflation data. But with the correction behind us, markets are now priced in-line with the Fed.

Nonetheless, we don’t expect any rapid runaway inflation data that would spark another market correction like we did in early-February, where markets sold-off over concerns that the Fed would tighten too quickly.

Wage growth has been persistently stubborn, despite tightening labour market conditions. The US added over 313,000 jobs in January beating the average median estimate of 200,000 jobs monthly – however wage growth slowed to 2.6% from 2.9%.

The labour data suggests some uncertainty surrounding existing slack in the US economy and lack of wage growth that would keep the Fed from raising rates too aggressively and stick to a more gradual pace.

A lot of the structural-plays has also not really changed, where we see a global economy that remains heavily indebted with an ageing demographic.

New frontiers in technology including advancement in robotics and increasing automation has also compressed wages, creating the so-called ‘Amazon effect’ that should keep inflationary pressures muted and from rising too quickly.

Though, recent hard data suggest that inflation is picking-up, we don’t expect a breakout in inflation anytime soon that would damage the shoots of early economic recovery. With most of these structural plays still in force, we expect inflation to remain range-bound between 1.5% – 2.5%.

Read More

Download PDF article