The price of one- and two-year inflation swaps implies that investors are underpricing the risk of a second round of price increases linked to the supply shock that is working its way through the economy.
With April’s consumer price index set to be released on Tuesday, one-year swaps were trading at 3.25% and two-year swaps at 2.93% on Friday—a level that we think is not fully pricing in the current geopolitical, economic and financial risks.
In our view, the buffers that have cushioned the global supply shock will be exhausted over the next three to four months.
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We expect April’s top-line CPI to increase by 0.7% on the month and by 3.7% from one year ago. For this reason, the 3.6% increase in nominal wages over that same time will mean that real, or inflation-adjusted, wages have turned negative.
Core CPI, which excludes the more volatile food and energy components, should advance by 0.3% on the month and by 2.6% annually.
Both the top-line and core CPI carry risk of a quicker pace of inflation as the Bureau of Labor Statistics adjusts its data following the extended government shutdown last year. The BLS assumed no increase in CPI last October—a stretch, to be diplomatic—and that figure will fall out of the data, resulting in upward pressure on both top-line and core CPI.
We expect a near-term peak of 4.5% or greater in top-line CPI with risk of a move toward 5% should oil and refined products not soon start flowing out of the Persian Gulf.
