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The Cooling Saucer of Inflation Worry

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Monday, April 12, 2021

Market indexes booked solid gains on Friday, helping send the S&P 500 up to yet another record high close to 4128.8. This morning, the cooling saucer returns — helping markets not get too ahead of themselves as the anticipation of a blowout near-term economy grows more palpable. The Dow currently looks to open -50, the S&P -5 and the Nasdaq -30 points. Without big news headlines augmenting outlooks, market participants are perhaps pausing to reflect.

According to a Wall Street Journal survey of economists and business leaders, along with 6.4% growth in U.S. GDP for full-year 2021 — the highest growth rate since the 7.9% we saw way back in 1983 — inflation rising to 3% is expected by this June. That’s two months from now, and the current 10-year bond yield is still an historically low 1.67%. So according to this survey, expectations are for growth to race ahead but inflation to nearly double — in two months.

We’ll get a hint whether they are correct Tuesday morning, when a new Consumer Price Index (CPI) report comes out for March. Previously, these numbers came in at +0.4% on headline, +0.1% “core” (stripping out volatile food and energy prices), which are reasonably gradual and positive. But look at last Friday’s Producer Price Index (PPI) numbers: instead of hitting an expected +0.5%, it doubled to +1.0% — and off a +0.4% the previous month, as well.

While in several ways this sort of economic jolt has been expected, what’s concerning market participants this morning is how little anyone trading stocks even bothered to pause on the PPI data. In this way, the market expects inflation to merely have a transitory effect, and the growing economy won’t pull inflation numbers up with it. Recent history would suggest this is the correct diagnosis; in fact, Fed Chair Jay Powell has been practically daring inflation to enter the market.

But if pricing data doubles month over month on both the producer and consumer side, can inflation really be that far off?

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