Albert Edwards, the bearish strategist over at Societe Generale, thinks inflation is coming to the U.S.
“Note the recent release of the US Productivity and Cost data shows that the upward charge in unit labour costs is intensifying,” writes Edwards in his latest research note.
“Most economists consider unit labour costs to be the principle driver of inflation and we can see from the chart below that core CPI inflation ebbs and flows with unit labour costs (we use a 2y% ch on the labour cost data to smooth excessive volatility hence it misleadingly appears that CPI leads slightly). After drifting downward for the last year to below 2%, core inflation may be set to rise more rapidly as unit labour cost inflation drags it higher. This would undoubtedly hurt an already jittery bond market.”
Here’s his chart:
Photo: Societe Generale
Edwards, however, is a bond bull. And inflation is bad news for bonds.
He clarifies that he thinks any inflation will be a brief blip in what he believes is a long-term bull market in bonds. His ongoing forecast is that deflation is the big risk and it will eventually bringing stocks down.
“Unlike the (equity) bulls who believe that the economy is strengthening and beginning to lift off, I believe we are either in recession already (as the ECRI thinks) or close to the end of the cycle, which it should be noted is already longer than average,” he writes. “The rise in unit labour costs, driven as it is by rapidly stalling productivity growth, is a warning to investors that cyclical gloom lies ahead.
“Hence in my view any rise in core inflation will prove short-lived and should not be taken as bearish for bonds, but instead the prelude for the next leg down in yields.”
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