European inflation is rising, and it should worry bond traders

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Inflation in continental Europe has risen recently, and will continue to do so, and this should “disturb bond traders”.

That’s the view of High Frequency Economics chief economist Carl Weinberg who believes that “it is mathematically assured that headline CPI increases, which have been rising for the past few months, will continue to go up in the months ahead”.

Here’s a chart, supplied by Weinberg, that shows what Weinberg is talking about:

And here’s the equivalent chart showing changes in annual core CPI:

It’s clear that, for the moment at least, inflation across Europe is trending higher.

Weinberg believes headline CPI in continental Europe will soon exceed its core equivalent, and this may see pressure continue on Euro-area sovereign bond markets.

“Our conclusion is a reaffirmation that Euroland’s headline CPI will accelerate on a year-over-year basis, surpassing the rate of core CPI increases. This should disturb bond traders, even though there is no real inflation here – just a trick of the maths”.

He believes that while the bond rout in Euro-area bond markets paused last week, that’s unlikely to remain the case.

“The big sell-off in Euroland bonds paused last week, but we hardly think it’s over. If anyone has the strength to look through the upset in Greece to find the economic fundamentals, we fear that a general rise in CPI-based inflation metrics will pick up in the May reports scheduled for this week. We think bond yields will rise“.

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