As we highlighted in the Weekly Market Summary, the markets’ attention at the start of this week was firmly on yesterday’s (Tuesday 13 April 2021) US CPI inflation reading following last week’s large jump in US PPI inflation (please see here).
Despite all the attention, as we have previously explained, thanks to the pass through of last year’s distorted oil price, a sharp rise in inflation in the coming months is a foregone conclusion – this is because the price of a barrel of WTI oil fell from around $60 pre the coronavirus outbreak to -$40 (yes, negative $40 – which effectively meant that buyers were being paid to take delivery of the oil), but has since slowly recovered back to $60.
And we weren’t wrong as our forecast turned out to be correct: headline US CPI inflation jumped by 0.6% during March, taking the annual inflation rate up to 2.6% – the largest monthly jump since August 2012!
However, we see no reason to be alarmed: core US CPI inflation which excludes volatile items such as food and energy ticked up to 1.6%, which is still well below the Fed’s 2% target; and the Fed’s recent commentary suggests that they aren’t going to react by tightening monetary policy – which is positive for equity markets.
Unfortunately, this is just the first of many US CPI readings we will see over the coming months which will show inflation romping away – and so annoyingly, we can expect the markets’ attention to remain fixated on each and every reading.
However, we still believe this inflation increase is transitory. As such, rather than focusing on (and worrying about) how prices of goods compare to last year’s distorted prices, we are focusing on what happens from here as the global economy slowly starts to reopen – and we don’t currently see any inflationary pressures, which suggests that inflation readings around the world are likely to peak during the next 12 months.
Investment Management Team