What’s next with prices? Will inflation rise? So far, lockdowns have stifled this process. Only the financial market expects it to jump. This can be seen, for example, in the valuation of bonds.
Inflation to rise?
– In the euro area and the USA, the so-called Consumer inflation (i.e. the increase in the prices of the basket of consumer goods and services) has so far remained clearly below the mythical 2%. In the United States, the January CPI reading surprised economists with a stabilization at 1.4%. The expected, but nonetheless surprisingly strong, jump in inflation was recorded in Germany, where the “pandemic” reduction in VAT rates ceased to apply in January. As a result, CPI inflation in our western neighbors jumped to 1%. For the euro area as a whole, the HICP index rose from -0.3% in December to 0.9% in January – he notes on bankier.pl Krzysztof Kolany. – According to the latest forecasts of the European Commission, HICP inflation in the euro area by the end of 2022 will not even exceed 1.5%. Consumer inflation (in base terms) below the target throughout the forecast horizon is also expected by the US Federal Reserve – he adds.
As he wrote further in his text, in order to understand the scale of the problem, one has to look at the US government bond market. You can see, for example, 5-year bonds, which are offered with a coupon of 0.375%. In addition, Treasury Inflation Protection Securities (TIPS) have been trading at negative yields for a year now, in other words, their buyers agree to pay the Treasury Department to allow them to buy these securities.
Why such seemingly bizarre politics? As can be seen, investors expect CPI inflation to rise in the coming years (we are talking about 5-year bonds). This shows the actual sentiment in the fiat currency market.
– It means that investors from the debt market are betting on a highly reflective scenario for the coming years. So the state of the economy is characterized by accelerating price inflation. And it is clearly accelerating – adds Knees on bankierze.pl.
Effects of high inflation
What will the rise in inflation lead to? It’s simple: to increase the valuation of stock exchange companies (on the occasion of a kind of detachment from the real economy) or other assets (e.g. cryptocurrencies, gold, silver, etc.). Investors with thicker wallets will simply look for places to hold their funds in times of high product and service price spikes in the market.