The truth about inflation

Posted by: Paul Donovan

22 Apr 2019
  • US headline consumer price inflation is below its long-term average. Every other US consumer price inflation number is easily above its long-term average. Weak service prices are lowering core Eurozone consumer price inflation. Other inflation numbers are near their long-term averages.
  • Different assets need different inflation data. Bond investors focus on the inflation that central banks target. That drives policy interest rates. However, inflation-linked bonds may use other prices. The Federal Reserve focuses on personal consumer expenditure prices; TIPS bonds use consumer prices. The Bank of England uses different inflation data from index-linked gilts.
  • Equity buyers look at core producer prices to work out pricing power and earnings. Most companies sell to other companies, not to consumers. But equity investors also worry about interest rates. Thus they must also look at the central bank's inflation target.
  • Corporate bonds buyers need to look at everything. Company earnings (using producer prices) affect credit ratings. Bonds as an asset class react to the consumer prices central banks focus on.
  • Small differences in data can have a big impact in a world of low, stable inflation. Using the right inflation number the right way is key to good investment decisions.

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