US inflation could 'overshoot', warns Investec

US inflation could 'overshoot', warns Investec

A sustained recovery in the oil price could see US inflation overshoot to the upside – a tail risk that neither the bond, currency nor equity markets are prepared for, says Investec Asset Management.


In his monthly Multi Asset Brief, Investec Asset Management co-head of multi-asset Philip Saunders warned investors not to be too complacent about US inflation.

External inputs such as the price of oil have had a significant negative impact on US inflation readings for the past 18 to 24 months, Mr Saunders said.

“What is of greater interest is the extent to which these transient factors have been implicitly priced into future estimates for inflation, and that the more persistent drivers of inflation – which have been operating in a more normal fashion – have been largely overlooked,” he said.

Assuming that non-energy elements of the US consumer price index (CPI) are at “historically normal” levels, inflation expectations are so low that they imply the oil price will reach zero by 2019 – a “wholly unrealistic assumption in itself”, Mr Saunders said.

Investec AM has modelled five potential inflation scenarios which consider a range of oil prices by year-end.

“While the central case is that inflation rates remain well contained, it is naïve to ignore the potential risk that the market could be surprised by higher inflation rates,” Mr Saunders said.

“Our models suggest inflation and wages will be firm going forward and our commodity team believes that robust oil demand and a material decline in oil supply will provide support to the oil price.

“If there is a more sustained oil price recovery, consistent with our commodity team’s forecast of approximately US$60 per barrel, there is a meaningful risk that inflation could even overshoot to the upside.

“This is a tail risk that neither the bond, currency or equity markets are prepared for.”

Read more:

No 'one-size-fits-all' approach to insourcing

Only 10% of Aussies taking lump sum: Rice Warner

Stockbroker charged with misusing client funds

ASIC partners with UK regulator on fintech 

NAB Financial Planning names new general manager

 

US inflation could 'overshoot', warns Investec
investordaily image
ID logo
promoted stories

Appointments

investordaily image

AMP names incoming chief risk officer

Jessica Yun

investordaily image

Antares Equities hires new director

Staff Reporter

Brad Fox

Former AFA CEO appointed to boutique board

Staff Reporter

Analysis

investordaily image

Warning lights flashing on Aussie equities

Roy Maslen

investordaily image

What’s in store for the economy in 2018?

Frank Uhlenbruch

ST Wong

Busting common passive investing myths

ST Wong