Yardstick of future US inflation climbs to highest in a decade

Market measures of future levels of inflation have climbed to a decade high this month, as investors digested company reports on how tangled supply chains, pent-up demand and rising energy prices were affecting their businesses.

The 10-year “break-even” inflation rate, derived from US inflation-protected government securities, rose to 2.62 per cent on Thursday, its highest level since September 2012 and above the Federal Reserve’s long-run inflation target of 2 per cent. The five-year break-even rate rose to 2.86 per cent on Thursday, the highest since March 2005.

Surging energy costs have propelled inflation measures higher in recent weeks, compounding pressures from supply chain disruptions that have hobbled companies seeking to deliver goods as economies recover from the coronavirus pandemic.

“It is certainly evidence that there is a lot more inflation on the horizon,” said Ian Lyngen, an analyst at BMO Capital Markets.

Corporate executives have been updating investors this month on the impact of rising prices on their businesses during the third quarter.

American Airlines management noted inflationary pressure in jet fuel prices and staff wages on its earnings call Thursday morning.

West Texas Intermediate, the US oil benchmark, notched its highest price in seven years this month. Energy costs are a large input into most market measures of inflation.

“These longer-term inflation expectations are suggesting that a rise in commodity prices may have a more durable impact on inflation,” said Subadra Rajappa, head of US rates strategy at Société Générale.

Rising fuel prices also cut into railroad operator Union Pacific’s margins, alongside logjams at ports leading the company to warn that it now expects shipping volumes to grow at a slower rate this year compared to earlier forecasts.

Mark Schneider, chief executive of foodmaker Nestlé, on Wednesday warned the pressure from rising inflation had “not improved” since he raised the issue on the company’s first-quarter earnings call in April. “Input costs are rising faster than we can roll forward through pricing,” he said.

The Federal Reserve has become more outspoken that it will not let inflation get out of hand, with the central bank preparing to tighten monetary policy by tapering its $120bn a month of bond purchases. Officials forecast increases to interest rates may be necessary as soon as next year.

Nonetheless, some investors are growing increasingly sceptical of the Fed’s commitment to combating rising inflation for fear of putting the brakes on the economic recovery, especially stemming from rising commodity prices. “It’s not the type of inflation that the Fed has historically been willing to adjust monetary policy to counteract,” said Lyngen.

In a recent letter to investors seen by the Financial Times, hedge fund manager David Einhorn’s Greenlight Capital said Fed chair Jay Powell “hasn’t lifted a finger to fight inflation”, adding, “inflation is here and it appears poised to worsen”.