The bond market is sending a clear signal, and it is not a pleasant one. US inflation data released this morning showed the Consumer Price Index rising 4.2% year on year, well above the Federal Reserve’s 2% target and confounding the ‘transitory’ narrative that central bankers have clung to with such desperation.
The immediate reaction was predictable: a sharp sell-off in US Treasuries drove yields higher, and UK gilts followed suit as global capital fled fixed income. The 10-year gilt yield jumped 12 basis points to 1.15%, a level not seen since the depths of the pandemic panic.
But the real story is not just the numbers. It is the response from the other side of the Atlantic. Donald Trump, never one to miss a chance to claim vindication, took to his social media platform to declare that ‘inflation love is back bigger and stronger than ever.
’ He went on to argue that the Biden administration’s spending spree, coupled with the Fed’s easy money, is fuelling an overheating economy that will ultimately punish savers and reward debtors. For a man who spent four years pressuring the Fed to keep rates low, this pivot to celebrating inflation is as cynical as it is dangerous. But he may have a point.
The market is now pricing in a 60% chance of a rate hike by the end of 2022, a dramatic shift from just a few months ago. The question is whether the Bank of England can afford to wait that long. The UK already faces its own inflation pressures, with producer prices and house prices surging.
The MPC’s ‘steady as she goes’ approach looks increasingly complacent. Investors are voting with their feet. The pound slipped 0.
6% against the dollar as the prospect of higher US rates makes dollar-denominated assets more attractive. Capital flight from London is a real risk if the BoE does not act soon. But the Chancellor may welcome a weaker pound as a boost to exports, even as it fuels import price inflation.
It is a devil’s bargain. Meanwhile, the fiscal picture darkens. Higher inflation pushes up gilt yields, which increases the cost of servicing the UK’s massive debt.
The government’s borrowing costs are rising just as it prepares to pump billions more into infrastructure and social care. The ‘inflation love’ that Trump talks about will soon turn into a hangover for UK taxpayers. The bottom line is this: the party is over.
The global economy is reflating faster than central banks can manage, and the ‘transitory’ narrative is a fairy tale. Investors should brace for a period of volatility as markets repriced to a new reality. The only certainties are higher prices, higher yields, and higher risks.
