In his monthly Multi-Asset Brief, Investec co-head of multi-asset Philip Saunders warned investors not to be too complacent about US inflation.
External inputs such as the price of oil have had a significant negative impact on US inflation readings for the past 18 to 24 months, Mr Saunders said.
“What is of greater interest is the extent to which these transient factors have been implicitly priced into future estimates for inflation, and that the more persistent drivers of inflation – which have been operating in a more normal fashion – have been largely overlooked,” he said.
Assuming that non-energy elements of the US consumer price index (CPI) are at “historically normal” levels, inflation expectations are so low that they imply the oil price will reach zero by 2019 – a “wholly unrealistic assumption in itself”, Mr Saunders said.
Investec has modelled five potential inflation scenarios, which consider a range of oil prices by year end.
“While the central case is that inflation rates remain well contained, it is naïve to ignore the potential risk that the market could be surprised by higher inflation rates,” Mr Saunders said.
“Our models suggest inflation and wages will be firm going forward and our commodity team believes that robust oil demand and a material decline in oil supply will provide support to the oil price."
He added: “If there is a more sustained oil price recovery, consistent with our commodity team’s forecast of approximately US$60 per barrel, there is a meaningful risk that inflation could even overshoot to the upside.
“This is a tail risk that neither the bond, currency or equity markets are prepared for.”