Inflation and Unexpected Inflation

Last month we saw continued signs of inflation moving up at a faster pace than expected, not just in the U.S. but globally as well.  And while absolute levels are not high, recent trends point towards higher levels. Much research has been done to indicate that periods of unexpected inflation are particularly good for the commodity asset class and increases the potential diversification benefits. If the recent climb in rates is the beginning to a long term trend then it could be an important global macro factor in assessing investors’ allocation to the commodity asset class.

The following points provide a collection of inflation numbers reported over the past month; most were above forecast.

  • The Consumer Price Index (CPI) rose a larger than forecast 0.6% (seasonally adjusted) in January, the largest increase since February of 2013. Core CPI (exluding food and energy) rose 0.3%, also above expectations.  (Bureau of Labor Statistics (“BLS”))
  • Over the past 12 months the all items CPI rose to 2.5% (before seasonal adjustment), the highest since 2013 and the core CPI rose to 2.3%, up from 2.2% the month prior. (Bureau of Labor Statistics (“BLS”))
  • The Producer Price Index (PPI) for final demand also increased 0.6% in January (seasonally adjusted), the largest increase in the last 20 months (Bureau of Labor Statistics (“BLS”))
  • Both the 2 year and the 5 year Breakeven Inflation Expectations (based on TIPS) have climbed to over 2.0% from under 1.0% and under 1.5% respectively in mid-2016. (Federal Reserve Bank of St. Louis (“FRED”) and Bloomberg)
  • U.S. Households’ expectations for Consumer Price Expectations rose to 2.9%, the highest level since mid-2015. (Federal Reserve Bank of New York, Bloomberg))
  • Euro Area: Consumer prices increased 1.8% year-on-year in January of 2017, following a 1.1% rise in December, and is the highest inflation rate since February of 2013, boosted by fuel and food prices. Excluding energy, food, alcohol and tobacco, core inflation remained steady at 0.9%. (Trading Economics and Eurostat  the statistical office of the European Union)
  • Canadian CPI price index advanced to 2.1% on a 12 month basis which is up from 1.5% reported in December. Excluding energy CPI was lower, although still rising at 1.5% versus 1.4% in December. (Statistics Canada, Bloomberg)
  • China’s producer price inflation picked up more than expected in January accelerating to 6.9%, the fastest since August 2011 and up from December’s rise of 5.5% reaching near six-year highs (National Bureau of Statistics of China (NBS), Reuters).

The uptick in inflation is occurring beyond the U.S. and in a number of important economies globally.
A trend worth noting.

Global Inflation Trends Jan 2011 – Jan 2017


(Click Here to View Larger)

Source: The Organisation for Economic Co-operation and Development (OECD)

Alan Konn

Partner & Managing Director of Price Asset Management