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Here’s a Perspective on the “Inflation Scare”

Some investment professionals have been expressing concerns about the potential for a jump in inflation.

This March 12 article excerpt from Business Standard provides an example:

Investors should be prepared for the biggest inflation scare since the 1980s, warned... [the] global head of equity strategy at Jefferies in his weekly note to investors...

"For now investors should be prepared for the biggest inflation scare since the early 1980s, and wait to see how the (US) Fed reacts. In the meantime, Treasury bonds are likely to sell off more, and cyclical stocks rally more, before any such tapering scare," [the equity strategist] said.

That said, [the equity strategist] believes that if inflation really does return on a longer term basis, it would mean that equities and bonds would become positively correlated on the downside - that is they will both go down in price together.

The return of inflation fears have been stoked again by the rise in commodity prices, especially oil, which has jumped over 90 per cent from its March 13 level of $35 a barrel (bbl.) to around $70/bbl. now. Prices of other key commodities, such as copper, are hovering at decadal high, while food prices have also been on an uptrend since the last few months.

The markets have been cognizant of the developments and have reacted accordingly. Over the past few weeks, a rise in bond yields, especially in the US, created a flutter in global equity markets on fears of a possible rise in inflation triggered by President Joe Biden's $1.9 trillion stimulus package, who signed the stimulus bill, called the American Rescue Plan, into law on [March 11]. The package provides $400 billion for $1,400 direct payments to most Americans, $350 billion in aid to state and local governments, an expansion of the child tax credit and increased funding for COVID-19 vaccine distribution.

Meanwhile, analysts at Nomura, too, share [Jefferies' global equity strategist's] view and expect inflationary pressures to tighten their grip going ahead.

Elliott Wave International's March Global Market Perspective provided this perspective on the "inflation scare," as the monthly publication showed this chart and said:

LatestInflationScare

To understand why this chart argues against an immediate inflationary pickup, recall this quote from Robert Prechter's 1995 book At the Crest of the Tidal Wave: "The single most important indicator of inflation is the rate of change in the money supply, as money supply growth is what inflation is."

While not a perfect proxy for money supply, central bank balance sheets effectively record the creation and destruction of money. So, the inflation scare of 2021 is not actual inflation, but a response to the effects of the fastest jump in ECB assets in almost a decade -- a rise that ended almost eight months ago. Notice, too, that the quickest ever monthly jump in ECB assets (notice the steep rise on the bottom chart) occurred back in October 2008, as the central bank fought to contain the fallout of a global financial crisis. That spike also occurred amidst widespread calls for inflation, but commodity prices had actually topped four months earlier, and much of Europe went on to experience consumer-price deflation over the following decade. With deflation fears about as low as they can go, now is the perfect time for another ugly chapter to begin.