Don’t be complacent on US inflation, investors warned

Don’t be complacent on US inflation, investors warned

A sustained recovery in the oil price could see US inflation overshoot to the upside – a tail risk that neither the bond, currency nor equity markets are prepared for, according to one asset manager.

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.”

 

Don’t be complacent on US inflation, investors warned
nestegg logo
Promoted Content
Recommended by Spike Native Network
Dr Terry Dwyer, Dwye... - Crocodile tears from the people who have driven land prices ever upwards with near zero interest rates? Where did these people learn economics?.......
Kevin - A very small investment in May/ June in Ethereum has literally made 2 million. And rising. Would have made more had I bought in March, but I needed.......
KateGan - This is our age of digital crimes... The only way to prevent such things is to raise the awareness about cybersecurity measures that every business.......
DavidL - Given that PPL is government funded, why doesn't the government foot the bill for the extra 9.5% - over the whole PPL period, not just 6 months? Why.......