Today, the September US CPI Urban Consumers is expected to print higher at 0.3% m/m versus 0.2% m/m a month previous The annualised data is expected to surge to 1.5% y/y. It has been a year since the core inflation has reached the Fed’s target of 2% and we now believe that Urban Consumer inflation is on its way higher. Janet Yellen also declared last Friday that it would be wise to consider the benefits of a “high-pressure economy”.
And this is exactly what the Fed needs. From our vantage point, it is clear that the Fed’s target of 2% is actually too low. The Fed needs much higher inflation in order to kill the US government’s massive debt and we believe that this inflation is now coming. This also explains why the Fed had been so reluctant to raise rates over these past few years.
This statement from Janet Yellen was not the only one. The BoE also, according to Governor Mark Carney, is prepared to let inflation go higher to support economic growth. The reality here is that central banks needs a strong differential between nominal rates and real rates to kill countries’ massive debts.
Today we will closely monitor any inflation development and we feel that this uptrend is only the beginning.
Yann Quelenn & Peter Rosenstreich - Swissquote