One always has to be careful not to overplay a few anecdotes, and project that onto the broader economy. But as the anecdotes accumulate, they eventually become data. Here is just a random sampling of 10 facts on the ground from the price front:
The Bank of Canada’s commodity price index has sprinted 24% in the first four months of the year to its highest level since 2014. (I’m not even going to tell you that the index more than doubled from a year ago in April—the biggest increase in 50 years—because last April was the depths of the lockdowns.) The ex-energy index is at an all-time high, with pronounced strength in all four major categories. This week brought fresh multi-year, or record, highs for commodities as diverse as lumber, copper and wheat.
The U.S. core PCE deflator, aka the Fed’s preferred inflation metric, rose 0.4% in March, its largest monthly rise in more than a decade. It’s now up 1.8% y/y and is poised to take a big step above the 2% goal as soon as next month’s release. Yes, base effects are at work here, but even the more recent 3-month trend was a crackling 2.6% annual rate.
U.S. employment costs rose 0.9% in Q1, the largest quarterly advance since 2006. While the annual rise is still moderate at 2.6%, the trend is grinding higher. These cost increases averaged a mild 2.2% last decade.
Canada’s average hourly earnings are also grinding higher. The “fixed-weight index”, which corrects for some of the massive shifts between sectors, rose 3.8% y/y in February. That compares with an average increase of 2.4% over the past decade.
U.S. M2 is ramping up again. Fuelled by stimulus payments, money supply trends are re-accelerating. After spiking last spring, M2 has climbed at a 21% annualized rate since the start of the year, matching its hearty year-over-year pace.
U.S. consumer expectations of inflation are at their highest level in a decade. I won’t tell you that the Conference Board’s survey is expecting 6.7% y/y inflation in the next year, because this survey always runs hot. But that result is up more than 2 percentage points from pre-pandemic norms, a big move.
Market pricing on inflation keeps quietly nudging up. The implied expected inflation rate over the next five years from TIPS has risen to almost 2.6%, the highest since 2008 (when oil was almost $150). True, that figure is somewhat skewed by the meaty readings that beckon in the next few months. But even the implied five-year forward rate has climbed to almost 2.3%, rivalling anything we have seen since 2014 (when oil was still above $100).
Asset price inflation continues to run amok. I won’t tell you about the wildness in Canadian home prices—average transactions prices up a record 31% y/y in March—because that’s so well-known. But broad measures of U.S. home prices are also now rolling at around 12% y/y, their strongest pace in at least a decade. Equity prices hit yet new highs this week, with the MSCI World Index now up more than 20% from its pre-pandemic highs in Feb/20. Meantime, everything from art, to bitcoin, to baseball cards are ripping higher.
Shipping costs are soaring. The Baltic Dry Index is at its highest level in more than a decade. I’m not going to tell you that it’s up 370% from a year ago, because of low base effects. And, true, it’s still well shy of the records set during the extremes in 2008. But, it’s yet another sign of rapidly rising cost pressures on the supply side.
The U.S. GDP deflator rose at a 4.1% annual rate in Q1. While seemingly not that extraordinary, this broad measure of inflation just posted its second-fastest quarterly rise in the past 30 years. (It trailed only a 4.2% gain in 2007Q1.) In turn, this helped drive nominal GDP to a towering 10.7% advance in Q1. Outside of last year’s Q3 snapback, that is the largest quarterly increase in U.S. nominal GDP since 1984.
The Fed believes that the inflation bump we are about to see in the spring data will be transitory. Well, yes, but an earthquake is also transitory. While we suspect that inflation will moderate somewhat later this year and into 2022, it’s quite clear that the risks are all to the high side. And that may be the single most remarkable aspect of this cycle—the fact that the world is emerging from its deepest downturn in the post-war era with high-side inflation risks, and not downside risks. That is a very different world than almost anyone expected us to be in a year ago, when all the chatter was about the potential of deflation and possibly negative interest rates. One could assert that this marks a policy success—that no one is concerned about deflation. And, fundamentally, both monetary and fiscal policy appears more than happy to “run the economy hot” for a spell. But, as rising inflation risks suggest, when you run things hot, you risk getting burned.