Inflation may be warming up in February, but it could be hot before May

Inflation is just warming up, but by late spring it could become very hot, even if only temporarily.

The consumer price index in February – a measure of inflation – is expected to rise to a level when it is released on Wednesday at 8:30 am ET. By May, the pace of major consumer inflation each year could be at a double-digit pace of February.

The debate in the market is whether the transition spike as the Fed and many economists say, or the beginning of a larger movement.

“The big question to ask is whether or not that level of heat that we are seeing before May will be maintained?” said US Barclays chief economist Blerina Uruci.

“I’m in a camp of people who think no, but there are some who think otherwise,” she said.

Economists expect the consumer price index to rise 0.4% in February, or up 1.7% from a year ago. That compares with a 0.3% increase in January, and a 1.4% year-on-year increase.

When energy and food are excluded, core CPI is expected to rise 0.1% in February, or an annualized pace of 1.3%.

Signs of inflation are already showing in the commodity side of the economy, and Uruci expects that to spread to the service side.

Soon consumers will be armed with another motivational study. The pent-up demand should start to raise prices on things like flights, public transport, hotels, outdoor food and rental cars as more people feel comfortable leaving their homes.

Companies have already been dealing with a range of rising prices.

The National Association of Manufacturers said in its quarterly survey on Tuesday that rising raw material costs are the biggest challenge facing companies.

The upbeat manufacturers, expecting yields to exceed pre-pandemic levels in the next month or two, the study found. They also had difficulty finding workers, who could increase wages as well as other costs.

The manufacturers association cited a report from the Institute for Supply Management, showing that the number of back orders was at its highest level since 2004 and that raw material costs were rising at the fastest rate since May 2008.

So far this year, oil prices are up more than 30%, and copper and wood are up nearly 15%.

Jim Caron, head of global macro strategies at Morgan Stanley Investment Management, said the rise in inflation could give investors a retreat in the spring.

However, he agrees with an assessment issued by Federal Reserve Chairman Jerome Powell that it will be temporary. Without wages moving up substantially, Caron does not expect to see a lasting move, but that will not stop investors from worrying.

The $ 1.9 trillion fiscal stimulus package is expected to add momentum to the economy. That has raised concerns of inflation, and the market could be lifted by a warmer-than-expected CPI report.

Gasoline prices were significantly higher in the January CPI report, up 7.4% although core inflation was flat. Gas prices could again be the cause of major inflation in February.

Caron of Morgan Stanley said the market could be anxious when higher inflation readings appear in the coming months.

“We all know there is a reasonable part to play,” he said. “This should be an air pocket. The pilot told me we’re going to hit one, but I’m still worried when we hit it.”

Prices are also rising on Main Street. A small business survey by the National Federation of Independent Businesses on Tuesday found that 25% of the companies it surveyed were net of plan price increases.

By May, Uruci de Barclays says headline inflation could be as hot as 3.6%. “The story has a root effect, but that’s just mechanical. That’s just a temporary sound,” she said.

“Consumer demand for goods remains strong, especially after the fiscal stimulus passed in December and we have another coming,” said Uruci. strong. The services side is the one that is going down. “

The Barclays economist expects a break between commodity inflation and services inflation. But she said services inflation will take a temporary one-off as the economy adjusts to increased demand.

“Until our population is united and people move freely and access the services that require social distance, we are not going to raise prices,” Urici said. that comes around Q3 or Q4. Some supply side bottles may present themselves in a few categories. “

Public transport will see fares rise after a year of empty trains and buses.

At the same time, shipping costs are rising, which could affect imported goods, Urici added.

While markets have been concerned about an overheated economy, the bond market is not pushing the pace of inflation significantly higher.

Market-based expectations show inflation running at an average of 2.2% over the next 10 years. That’s higher than the 2% the Fed had previously targeted, but well within the scope of its new policy of targeting an average range of around 2%.

The Fed favors a personal consumption cost index as a measure of rising costs of goods and services. In fact, the so-called PCE deflator has been showing a sub-inflation rate, at a rate of around 1.5% in January.

Peter Boockvar, chief investment officer at Bleakley Advisory Group has been warning of inflation for months. “Inflation has never been negative,” he said. “The whole world was shut down and inflation was never negative.”

“The question is what happens in September, October and November? These underlying effects can be the way out or they could be sticky,” Boockvar said. “I think they’ll be sticky.”

Meanwhile, Mark Zandi, chief economist at Moody’s Analytics, expects a higher explosion in inflation data in the spring, after which it will fall back.

“We’re going to get big numbers here in the next couple of months,” he said. “I think we’ll go back below 2% for a bit and then we’ll go back. I mean we will be consistently above 2% by the end of the year heading into next year. ”

“Then by the end of 2022, inflation will consistently be above the Fed’s target,” Zandi said. “Early in 2023, I think they’ll be raising short-term interest rates.” At that point, we’ll be at full earnings, he said.

Zandi said that inflation will be higher and will eventually reach 2.5% to 3%. That may surprise investors.

“We then have to work to get inflation back to 2%. That’s a problem [Fed officials] want, “he said. I don’t think investors have bought in how high inflation is …. For 20, 25 years, we barely got to 2%. “