According to Pioneer Investments’ head of European fixed income, while much of the increase in expectations of inflation stem from a belief that there will be a shift from monetary to fiscal stimulus in the US that will then be copied in other major economies, it is by no means assured.
Starting with the US, Le Saout cautions that it must be remembered that a lot of work will be needed before the president-elect can get his stimulus programme enacted.
But, he said: “The legacy of the Obama healthcare price increases and year-on-year effects means it is likely that the US headline inflation rate could accelerate north of 2.5% in Q1 2017.
“This will probably happen at the same time as the unemployment rate continues to gradually fall towards 4.5%, and may stoke fears that the Fed is indeed happy to let the economy ‘run hot’ for a period.”
United Kingdom
The UK, however, is a different beast altogether. Not only have the gaps between nominal gilt yields and inflation protection ones risen sharply already, implying the market is already discounting a substantial increase in UK inflation, but also, he said, the economic conditions in the coming months might not be as conducive to inflation as the market expects.
“The recent depreciation in the UK currency means there could likely be a short-term spike in UK inflation, but in our view UK domestic economic conditions over the next 12-24 months may not be conducive to a sustained pick-up in inflation,” he said.
Europe
In Europe, Le Saout said, the situation is a little more mixed.
“We anticipate a short-term spike in Euro-area inflation towards 1.5% in Q1 2017, but then it should fall towards 1% over the remainder of the year (assuming the oil price stays around its current level),” he said.
While Euro-area inflation breakevens in his estimation are close to fair value at present, one area that does look good value is the very long-end of the Euro inflation curve.
“30-year Euro-area inflation linked bonds still project that inflation will remain below 2% for the next 30 years, something we think is probably too pessimistic,” he said.
