USA: Inflation rate increased to 1.4% and its future relevance for Treasuries – Nord LB column

The Bureau of Labor Statistics has just released updated consumer price data (CPI) in the United States. After three declines in a row last spring, the price level at consumer price level has now risen for the seventh month in a row. In the reporting month of December, an increase of 0.4% m / m was reported. The inflation rate, which had fallen to as low as 0.1% in May last year, has now climbed to 1.4% y / y. Consumer prices excluding food and energy showed only a marginal increase. The annual rate remained at 1.6%.

The price developments played basically no role in the last few months – neither for the financial market participants, nor for the central bankers. The Federal Reserve oriented its monetary policy exclusively to the economic effects of the corona pandemic. Regardless of all inflationary tendencies, the central bankers will only focus in the coming months on at least somewhat cushioning the massive burdens with monetary policy support.

Nevertheless, some market participants seem to be slowly adopting a slightly different focus. The start of the year was particularly turbulent on the US bond markets: for five days in a row, the yield on ten-year US Treasuries rose significantly. From 0.90% at the end of 2020, it started a real high flight within a few trading days to over 1.18% yesterday.

There are several reasons for now higher US yields: First, the situation in the US Senate after the by-elections in Georgia allows the assumption that with the majorities achieved in Congress, the Democrats will strive for an even more expansive fiscal policy, which will also result in higher issuing volumes implies. Second, with the vaccinations, the prospects for an economic upturn in the course of 2021 are getting better and better. An economic boom could be imminent following the pandemic. Thirdly, for this reason and for reasons of the higher national debt and spending, a certain increase in inflation must be expected. Initially, this will mainly be due to the foreseeable statistical base effects from last spring. In addition, higher oil and gasoline prices are already pointing to higher inflation rates, which we believe could even reach the 3% mark in the USA for a short time by mid-year (and over 2% in Germany).

Even higher inflation rates by the summer should come as no surprise. Following this spike, however, we do not see inflation rates that are too high in the long term, so that our assumption that an accommodating Fed monetary policy can be expected to continue for some time remains. This is exactly what US Federal Reserve Bankers James Bullard and Eric Rosengren pointed out yesterday. We expect US yields to rise in the future, but only slowly.

Conclusion: US consumer prices rose by 0.4% m / m in December, so that the inflation rate rose to 1.4% y / y. While the price data did not play a role in 2020, it is likely to receive a little more attention in the course of 2021: We expect the US inflation rate to rise towards 3% in the summer. These medium-term prospects explain part of the soaring government bond yields observed in recent days – especially in the US. In addition, the economic implications of the Senate elections and the vaccination campaign that had started had a positive effect on returns. Even if a further (base-related) rise in inflation rates can be assumed for 2021, we see this as a primarily temporary phenomenon and an almost negligible problem for central bankers for a long time to come. Nonetheless, the economic outlook in the second half of 2021 suggests a gradual increase in yields, which, according to our forecasts, will be slow (last).


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