One ongoing debate amid the reflationary impulse that’s driven breakevens to multi-year highs and buoyed various manifestations of the pro-cyclical trade in equities, revolves around the notion that the “trade” may be well ahead of the “reality.”
More simply: “Reflation” is not the same as inflation. Reflation is a more nebulous term that gets bandied about, sometimes with reckless abandon, to describe anything that looks pro-cyclical, while inflation is an actual, observable phenomenon.
Many market participants seem to think that realized inflation will “disappoint” relative to expectations built into market pricing, possibly leading to an unwind in the latter.
Read more: The Reflation Trade May Be About To Unwind
Against that backdrop, CPI in the US came in as expected Wednesday, printing a 0.3% MoM rise for January. The YoY read was a cooler-than-anticipated 1.4% rise.
Core, meanwhile, missed, printing unchanged MoM, and 1.4% YoY. That compares to expectations for a 0.2% monthly gain and 1.5% annual rate.
The energy index rose, but is still down on an annual basis. Prices for used vehicles fell, as did the recreation index and airline fares.
“We’re confident that forward inflation expectations (those driving 10-year breakevens to 220 bp) can sustain any implied setback from a disappointing start to the year for core-CPI,” BMO’s US rates team said.
That’s probably true, but Wednesday’s data may reinforce the notion that the market is ahead of “reality” when it comes to price pressures. Although the nascent bond bear took a breather on Monday and Tuesday ahead of 10- and 30-year supply, the week started off with some flashy numbers on 10-year breakevens and 30-year yields.
Additionally, you’ll recall that recent color from PMIs stateside suggests pandemic-related bottlenecks and supply chain issues are creating price pressures which may eventually find their way to consumers.
This is all set against the Beltway stimulus battle, and a somewhat amusing debate between Larry Summers and Janet Yellen over whether Joe Biden’s relief plan will “overheat” the US economy. Summers claims it could. Yellen is more worried about the on-the-ground reality for millions of jobless Americans and scores of families experiencing food insecurity.
Speaking of everyday Americans, all of this usually comes across as senseless banter. Real wages for most folks haven’t risen materially in decades. Between that and the longer-term spiral in prices for things like healthcare and education, everything mentioned above is, at best, esoteric on Main Street. At worst, it’s meaningless. Nobody struggling to make ends meet cares about any anecdotes from ISM manufacturing or what the MoM miss/beat was on core CPI.