Fear of inflation? Look at this board before you panic

Inflation is on the rise in the United States, but if price pressures were to persist, contrary to the Federal Reserve’s expectations, the data would paint a different picture, an economist said on Friday.

In a note to clients, Daniel Vernazza, Chief International Economist at UniCredit Bank, pointed out the complicated but interesting graph below:

© UniCredit Research

The graph represents the evolution of prices (vertical axis) compared to the evolution of expenditure (horizontal axis) compared to pre-pandemic levels in February 2020, by sector. It uses the personal consumption expenditure deflator instead of the consumer price index because the PCE is the Fed’s preferred measure of inflation and to make better comparisons with spending data.

This shows that most of the items retreated and advanced along the horizontal axis, implying that prices showed little sensitivity to changes in demand, Vernazza explained. And for the service sectors particularly affected by the pandemic, including airline tickets and accommodation, the reopening of the economy has only led to a partial recovery in prices, which have still not returned to the levels. before the pandemic.

It’s a somewhat different story for car rental, where severe supply shortages have driven prices up, while spending in the sector remains well below pre-pandemic levels due to the limited supply, he said. For used cars, the combination of a shift away from public transport by commuters and a global semiconductor shortage for new cars has pushed up both demand and prices.

What’s important to note, Vernazza said, is that since the rise in inflation is largely due to the reopening of the economy and supply shortages, it is will likely prove temporary as the direct effects of the pandemic wear off and supply adjusts to meet demand.

But what would a more lasting inflationary threat look like?

In this case, most of the items would occupy the upper right quadrant of the graph, reflecting what economists call “demand-driven inflation,” Vernazza said. To date, “this is clearly not the case,” wrote the economist.

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As inflation jitters rocked financial markets just last month, investor worries appeared to be fading. Treasuries rallied on Thursday, despite another reading of the consumer price index higher than expected, sending the yield on the 10-year Treasury bill below 1.45%.

See: Treasury yields fall despite rising inflation – here are some reasons why

Higher inflation is generally seen as bad news for bonds, eroding the value of interest payments made to holders. Stocks rallied on Thursday, with the S&P 500 approaching a record close on Thursday, while the Dow Jones Industrial Average is not far from its all-time high and tech stocks rise, more sensitive to rates. interest, pushed the Nasdaq Composite higher.

Notice: Here’s why higher prices for car rentals, plane tickets and gowns won’t lead to higher inflation

The Federal Reserve is holding a political meeting next week. While Fed officials largely stuck to their view that inflationary pressures will prove to be “transient,” several also said it was time to start thinking about when it would be appropriate to discuss the issue. withdrawal of asset purchases at the center of its extraordinary monetary policy efforts to support the economy and clean up the labor market.

The Tell: Why the bond market might not suffer another tantrum tapping when the Fed signals it is ready to move

And some economists warn that signs of inflationary pressures in more cyclical segments of the economy are starting to appear.

“Rent and homeowners’ rent equivalents have rebounded sharply in recent months, and OOH food prices have jumped 0.6%,” said Michael Pearce, senior US economist at Capital Economics, in a statement. note. “It is no coincidence that restaurant rents and prices rise faster when wage growth also accelerates.”

Pearce said a continued increase in job vacancies shows worker shortages “are real and are escalating.”

Also see: ‘Take this job and push it’: US workers quit at record highs

“The recent strength in inflation and signs of labor shortages could prompt a handful of regional hawk Fed chairmen to push forward their rate hike projections and step up calls to cut government purchases. active as early as possible at next week’s FOMC meeting, “he wrote. “But we suspect the majority of the committee will stick to ‘largely transitional’ language and instead focus on the yawning shortage of jobs from pre-pandemic levels.”

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