Albert Edwards is back from holiday, has killed off his bout of seasonal effective disorder, and now thinks U.S. market participants are poised to overreact in a big way to new inflation data.
The U.S. recovery is now taking hold, and while inflation data has been lower than expected for the past year, it should now naturally move higher. There are several reasons for this, according to Edwards:
- Now that we’re fully in the recovery, inflation will rise as a result of an end to the period where companies could cut prices and costs
- Rents, which make up 40% of core CPI, are now at the end of the deflationary trend
- Chinese inflation will be passed on to the U.S. via imported goods
We’ve heard the rent story before, from Deutsche Bank. The China pass through is the obvious impact of rising inflation there. And the economic recovery hitting full steam is sure to boost CPI. So there’s going to be a rise in inflation, but why are investor’s so nervous?
From Albert Edwards:
And given the jitters that abound about the impact of QE on inflation, I would expect the markets to over-react to these developments. Many market participants who believe an inflation take-off is just around the corner will then have more evidence to berate Central Banks for being well behind the tightening curve.
Because market participants are on edge, we’re going to see a “melt-up” in bond yields ending the down trend that is a “total over-reaction,” according to Edwards.
That over-reaction could cause a ton of problems for the U.S. economy, notably increasing pressure on the U.S. government and its deficit problem.
Check out the link between China’s CPI, and U.S. import prices:
Photo: Societe Generale