From Deutsche Bank’s Torsten Slok:
…We know from history and from the economics textbook that once the economy hits full capacity then prices start trending higher. In other words, inflation is not a smooth linear process. Inflation is more like a binary 0/1 process; when inflation starts moving it starts moving and it tends to overshoot its target. The chart below shows that some measures of wages are already displaying this property. This does not mean that core inflation is about to trend up soon but the uptrend seen below is important because it illustrates the binary nature of the inflation process. In the meantime, rates investors continue to be caught in a difficult game theory problem: I know I will see inflation at some point. If I short rates today it is expensive and I will therefore underperform my benchmark. If I continue to bet on low inflation and hence low rates then I will earn the yield/carry. So why don’t I just continue to bet on low inflation and once we see signs of an uptrend in inflation then I will run for the exit. Together with everyone else.
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