Will inflation thwart the US economic recovery?

Market Questions is the FT’s guide to the week ahead

FT reporters

US inflation worries are set to escalate this week with the release of core consumer price data, while mixed GDP signals for the UK economic recovery are expected. Inflation is also coming into focus for investors in China. © FT montage


Will inflation thwart the US economic recovery?

Corporate America is poised to deliver the best earnings season in years, raising hopes of a swift economic recovery. 

But executives are flagging one key pressure point during analyst calls: rising prices.

For months, Wall Street investors have been fretting over inflation as the nation’s economy reopens from the pandemic. 

On Wednesday, the US labour department’s core consumer price index for April could provide the clearest evidence yet that those price pressures could become a mounting threat to the recovery.

For March, core CPI, which excludes the more volatile prices of food and energy, remained relatively tame, at a 1.6 per cent year-on-year increase. 

But economists polled by Bloomberg expect that number to jump to 2.3 per cent for April, which would be the highest level since the coronavirus pandemic took hold in the US.

“Near term, it’s clear demand is going to be running ahead for some time, and I think that’s why we see inflation going up,” said Jean Boivin, head of BlackRock’s investment institute.

Bond investors wary of inflation backed out of US government bonds this year, sending the 10-year yield as high as 1.75 per cent in March. 

Since then, the yield has backed down to below 1.57 per cent. 

A drab set of US jobs figures on Friday could tame inflation nerves further. 

But rising consumer prices still rank high on worry lists, particularly if they gather forcefully enough to test the Federal Reserve’s resolve for plentiful stimulus.

“We keep hearing about risks, whether it’s valuations, whether it’s inflation, whether it’s rising [coronavirus] cases again,” said Esty Dwek, head of global market strategy at Natixis. 

“There are enough concerns that are persisting on investors’ minds that we haven’t fallen into complacency.” Aziza Kasumov


How quickly is the UK economy rebounding?

With the Covid-19 vaccination programme well advanced and restrictions easing, the UK economy is rebounding from its latest pandemic-induced decline at the start of the year. 

But for investors, the question is how quickly. 

On Wednesday, economic growth data for March will provide the latest clue. 

Economists surveyed by Bloomberg expect growth to accelerate to 1.3 per cent month on month from February’s marginal 0.4 per cent rise, partly as a result of a boost from the education sector as schools reopened. 

Quarterly data, however, is forecast to show a decline of 1.6 per cent.

Last week, the Bank of England upgraded its growth forecasts for 2021, bringing forward the point at which it expects the economy to recover its pre-pandemic peak to the final quarter of this year. 

Any further pick-up in growth could prompt investors to price in an earlier unwinding of the BoE’s bond-buying programme or even interest rate rises, markets currently anticipate two by the end of 2024 — which would boost sterling and knock gilt prices.

“Data is going to have a pretty direct read-through for Bank of England policy,” said George Buckley, chief UK economist at Nomura. 

“The stronger the recovery, the less of a need there is for as much monetary policy support.”

The BoE has “stepped back from guiding and hand-holding the market” leaving the door open for a shift in the implied path of interest rates, according to Bank of America UK economist Robert Wood.

“As economic data improve in the coming months, we continue to see little to hold back hawkish market moves,” Wood said. Tommy Stubbington

How worried should investors be about China inflation?

Chinese inflation is back in focus for investors as factory gate prices surge on the back of the nation’s rapid recovery from the coronavirus pandemic.

April’s consumer price index, out on Tuesday, is expected to show a rise of 1 per cent year on year, according to economists surveyed by Bloomberg. 

Meanwhile, producer price data out the same day are forecast to climb 6.5 per cent over the same period — their fastest pace of growth since 2017.

Producer prices, which measure factory gate rates, have been pushed higher in part because of the increasing cost of oil and an array of other commodities. 

In January, producer prices rose for the first time since the start of the coronavirus crisis, and in March they leapt 4.4 per cent.

Consumer price inflation entered negative territory for the first time in more than a decade in November. 

However, the measure was heavily skewed by pork prices, which make up a large amount of the basket of goods and spiked in 2019 because of swine fever.

Expected rises in inflation figures come as China’s economy continues to grow. 

By the end of last year, the key growth measure had already exceeded its pre-pandemic level, prompting a shift in rate change expectations and credit tightening in the months that followed.

Policymakers and advisers in the country have warned about the risk of asset bubbles, especially in the property sector.

Larry Hu at Macquarie said inflation was “the question on everyone’s mind”, but suggested it should be mild in China this year. 

“Look at the US, not China, for the inflation upside risk,” he noted. Thomas Hale

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