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A Chart Showing Why Deflation Is Dead

A Chart Showing Why Deflation Is Dead by Richard Turnill, BlackRock

U.S. deflation is no longer an imminent risk. Global Chief Investment Strategist Richard Turnill’s chart of the week helps illustrate why.

U.S. deflation is no longer an imminent risk. This week’s chart helps illustrate why.

Deflation

U.S. Deflation

U.S. inflation has been picking up, following a prolonged period of subdued price rises, as evident in the chart above. The U.S. Consumer Price Index (CPI) in April posted its largest increase since February 2013. The inflation upturn is even more pronounced in forward-looking prices-paid surveys, such as the Institute for Supply Management’s Price Index, our analysis suggests. A greater number of purchasing manager survey respondents reported paying more for products and services in March and April, as the chart above shows.

We see the inflation upturn continuing over the near term. Energy supply-demand fundamentals are turning from a headwind into a tailwind for inflation. Oil supply has tightened, and demand is picking up, primarily out of China and India. This suggests current prices look increasingly sustainable, unless we get a significant reopening of idled shale-oil production. It points to energy’s downward pressures on inflation beginning to subside, in line with the view expressed in hawkish Federal Reserve (Fed) meeting minutes released last week.

Our analysis suggests rising U.S. inflation pressures will persist, as factory-gate price increases are passed on to consumers. It is not just the rebound in energy prices pushing inflation higher. An appreciating U.S. dollar is abating as a headwind. Prices of more stable service-based components of the CPI are also rising. Wages, too, are moderately increasing, as are survey-based consumer inflation expectations.

Bottom line: The odds of the Fed increasing rates this summer have increased, although we see only one to two rate increases this year amid slow U.S. growth. We are cautious on duration, but rising inflation means owning Treasury Inflation Protected Securities (TIPS) in lieu of nominal Treasuries can be an important hedge for fixed income portfolios. Read more market insights in my weekly commentary.

Richard Turnill is BlackRock’s global chief investment strategist. He is a regular contributor to The Blog.