US: Beware of base effects as Headline CPI to fall – Nomura
|Analysts at Nomura explains that the oil rebound helped stoke a rise in headline inflation rates as base effects turned positive but now oil prices to remain on the back foot and even as medium term fundamentals remain supportive, inflation is likely to fall.
Key Quotes
“Could the global reflation trade deflate? That is a question we have been increasingly asking ourselves. In addition to the optimism about pro-growth fiscal policies by the new US administration, a key input into this thematic in late 2016 and early 2017 was the bounce-back in oil prices and other commodity prices. The change in oil prices was driven by a combination of both higher demand and reduced supply. The oil rebound helped stoke a rise in headline inflation rates as base effects turned positive. In turn, nominal bond yields followed as expectations for global central bank policy became relatively more hawkish.”
“But oil prices have recently slipped back, with WTI crude now 10% below its late-February high of $54.45. An underappreciated risk for markets and the reflation trade in the months ahead could be the follow-through of a turn lower in energy base effects in headline CPI. This should come through even if prices stabilise, but would be more pronounced if there are further near-term falls. Although markets should be rational and should be anticipating this, history shows this is often not the case. We note that consensus headline CPI expectations for various major economies for 2017 have not been trimmed, despite the recent pull-back in oil prices. Markets could be complacent.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.