‘This is not inflation’: Economist says expectations are unanchored from reality
Inflation expectations are detaching themselves from reality, meaning markets might be overplaying the rise in U.S. Treasury yields, according to Carl Weinberg, chief economist at High Frequency Economics.
Global markets have been rattled in the last 24 hours after the yield on the benchmark U.S. 10-year Treasury note climbed above 1.3% for the first time since February 2020, while the 30-year bond also hit its highest level for a year. Yields move inversely to bond prices.
Yields tend to rise with inflation expectations as bond investors start to believe central banks will take their foot off the gas and reduce their asset purchases. Higher yields can also mean more debt servicing for major firms, which tends to knock stock markets as traders reassess the environment for investing.
Market expectations for U.S. inflation rates have reached their highest levels in a decade, driven by increased prospects of a large fiscal package, progress on vaccine rollouts and pent-up consumer demand.
However, Weinberg suggested that the anticipated rise in inflation expectations was something of a red herring when faced with the economic realities.
He suggested that much of the short-term inflation pressure is a result of unusual disparities in supply and demand brought about by the pandemic, which should evaporate as economic activity normalizes.
“Excess capacity in the economy is also likely to rein in the ability of companies to pass higher input prices through to consumers,” Haefele said.
“The fact that near-term market inflation expectations are higher than longer-term expectations is consistent with the view that the increase in inflation will not persist.”
Reference: CNBC
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