Fears Mount About Inflation Returning With a Vengeance (But No Signs Of Inflation Yet)

Given the reaction of The Federal Reserve to the Covid-19 virus, it is understandable for investors to freak-out about possible Weimar Republic / Venezuela-like hyperinflation.

(Bloomberg) — Even a calamity of disease, death and economic destruction afflicting the world all at once isn’t enough to suppress the notion in some quarters that inflation could return with a vengeance.

The coronavirus crisis has killed hundreds of thousands, incapacitated millions and affected the livelihoods of billions — prompting policy makers to fear a deflation spiral reminiscent of the Great Depression. But economists including former Bank of England official Charles Goodhart, and investors such as BNP Paribas Asset Management, are asking if a different phenomenon lurks in the wreckage of global growth.

Muted Price Growth

IMF predictions for inflation rate at end of 2021

Screen Shot 2020-05-03 at 10.53.12 AM

Yes, inflation rates are muted in the short-run, but the surge in government spending and The Fed balance sheet is scaring some people about “inevitable” hyperinflation.

fedbalfedeff

And the surge in M2 Money Supply YoY is leading some to panic.

corecpim2

But like the Titanic that sank after striking an iceberg in calm seas, there are calm seas on the inflation front. The EUR Inflation Swap Forward 5Y5Y is less than 1%.

5yinf

The USD Inflation Swap Forward 5Y5Y rate is 1.7944%.

usdswap5y5y

But USD Swaption volatility remains calm after a jolt upwards in March.

swapvol

And the US Treasury Inflation Indexed curve is negative beyond 3 years.

infindede

So, the data is showing calm inflation seas, not gut-wrenching Venezuelan-like inflation.

mnuchin

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.