The first hint of a jump in US inflation and what did all those brave souls among the bond bunnies do? Why they jumped sideways and sent US bond yields lower!
So much for the bond market being the all-powerful monster that would tame central banks post-Covid, as some alarmist writers of economic nonsense had been insisting as they fretted over quantitative easing, higher inflation and anything else they could lay their hands on.
The US Consumer Price Index jumped 0.6% in March, the largest gain since August 2012, after rising 0.4% in February. A 9.1% surge in fuel prices accounted for nearly half of the increase in the CPI. Petrol prices rose 6.4% in February. Food prices rose 0.1% as the price of potatoes unexpectedly rose and food consumed outside the home also rose 0.1%.
For the year March, the CPI surged 2.6%. That was the largest gain since August 2018 and followed a 1.7% increase in February.
And there’s the outbreak of inflation – shock horror, just as the talking heads had warned – but it passed without too much pain and bond yields eased afterwards.
Core inflation (excluding food and energy), rose 0.3% after up from 0.1% in February. That was the largest gain in seven months in the core CPI as the annual rate rose 1.6% after the 1.3% rise in February.
The Fed tracks the core personal consumption expenditures (PCE) price index for its 2% inflation target, (now a flexible average rather than hard target, a little like the flexible 2% to 3% over time target for the Reserve Bank.
The core PCE price index rose an annual 1.5% in February and judging by the core CPI, probably nudged a bit higher in March (we will find out in a fortnight).
The yield on the key 10-year Treasury bond ended down 5.6 basis points to yield 1.6198%, well below a 14-month high of 1.776% hit on March 30.
The Fed – especially chair Jay Powell, have been warning for a while that inflation will make a “transitory” jump mid year as the comparative base rolls over and the big falls a year ago drop out of calculations. The same is going to happen here as well, according to RBA governor, Phil Lowe.
Central banks want to see inflation rising because it shows the rebound from the Covid lockdowns is actually strengthening and the higher demand is increasing prices for goods and services.
Deflation or disinflation means weak demand, a lot of spare capacity in the economy and problems ahead for economies showing them.
The US isn’t one and nor is Australia or New Zealand (which left monetary policy on hold yesterday – see separate story).