Economists and central banks are at a large disadvantage to scientists: there is simply no way to reliably model the results of their actions in the same way a geneticist can sequence a genome. At the same time, they know that moderate inflation is quite literally the oxygen of the global economy. It encourages consumers to spend now versus later and businesses to invest now for a rising stream of cash flows in the future. It keeps corporate earnings tracking higher through economic cycles, enticing capital to invest.
Inflation is quite literally life to modern economic systems and the DNA of modern capital markets. And while neither central bankers nor capital markets know how to untangle and read its exact makeup, we all know it is important. Is the recent backup in rates a clear sign that the woolly mammoth of inflation is on all fours and starting to walk? At this point, that is more a hope than a certainty.
How to interpret the recent backup in sovereign bond yields everyone is talking about? Is it a harbinger of real inflation?
So far, according to Nick Colas, we’re really just talking about a short squeeze in oil, a slightly warmer tone to wage statistics and eye-popping percentage rallies in yields that are really just coming off of the zero-level and not terribly meaningful in absolute terms.